Financial Statements with Adjustments
Financial statements are those accounts and statements that are created at the end of an accounting cycle to learn about the business operations and financial performance of a firm. Their primary goals are knowing a company's financial situation and determining whether a profit was earned or suffered from loss during the accounting period. The first goal is accomplished by creating a Trading Account and a Profit & Loss Account, which are also referred to as an "Income Statement."
Financial statements are recorded in a journal after that moved to a ledger, and finally, the final account is created. The systematic and simple format is used to show important financial data. Trading Account, Profit & Loss Account, and Balance Sheet are the three components of a financial statement.
At the end of the accounting period, adjusting entries are made so that your financial statements more correctly reflect your income and expenses. Adjusting entries normally comprise one or more balance sheet accounts and one or more profit and loss statement accounts.
What is Trading Account?
Trading account shows the company's gross profit or loss from sales and purchases that occur during a specific accounting period.
What is the Balance Sheet?
A balance sheet contains the assets, liabilities, and shareholder equity of a company at a specified time period. Assets are financial resources used by enterprises, and they can be categorized into fixed assets, current assets, fictitious assets, cash & cash equivalents, wasting assets, tangible assets, intangible assets, accounts receivables, and working capital.
What is a Financial Statement?
The revenue, cost, and expense summary for a given period are listed in the profit and loss (P&L) statement, called the financial statement.
Objectives and Needs of Adjustments
- To learn more about the actual profit or loss: Through adjustments, the user considers all the accounting items that are important to a current fiscal year but were not recorded in the books for any reason. This helps in obtaining the year's actual profit or loss.
- To learn more about the company's actual financial situation:
Adjustments provide a vast amount of accounting information about assets and liabilities that should be taken into consideration while creating the balance sheet. We will be able to determine the company's true financial situation only when adjustment entries are recorded in the balance sheet. - To fix the mistakes in the accounting records
Adjustment is essential in order to correct any error that was previously reported in the books of accounts.
- In order to complete the unfinished transactions:
A partial or complete omission of any accounting item can be corrected by the user by using adjustments.
- To prepare provisions for depreciation:
Provisions are created at the end of the fiscal year. With the aid of adjustments, users can create depreciation allowances.
- To include all income, whether already received or yet to be received:
The Profit & Loss Account will not give the true profit or loss for the year if all unbilled revenue is missing from it. Adjustments allow us to include all of the financial year's income, and this helps to determine the company's true income.
- To record all advance-received income:
The term "income received in advance" refers to income that is not earned but is received throughout a fiscal year.