Question

You have taken over a set of accounting books for a small business as a part-time job. At the end of the first accounting period, you have partially completed the work sheet by entering the proper ledger accounts and balances in the Trial Balance columns. You turn to the manager and ask, "Where is the list of additional information I can use in entering the adjusting entries?" The manager indicates there is no such list. In all the text problems you have done, you have always been given this information. How would you obtain the information for this real-life situation?

What are the consequences of not making all of the required adjustments at the end of the accounting period?

Answer 1

In real life situation, additional information regarding the final adjustment entries required can be obtained as follows:

- Scrutinise the ledgers to see if any transaction is unaccounted for. For eg, rent ledger would typically show if rent for entre year has been booked or not. Insurance expense ledger will show whether prepaid insurance has been booked or not.

- Verify the stock ledgers with physical count of inventory, if applicable. This will help identify any inrecorded purchase or sales or any shortfall in inventory

- Scrutinise the ledgers of key customers, especially those who paid close to year end, to identify if any ayment is an advance paid for future delivery of goods/services. Likewise, review the nature of amounts paid to vendors near the cutoff date

- Review the mployee ledger accounts to see if there are any unclaimed expenses or any debit balances lying in these accounts

- Review the depreciation rates used from the previous year accounts

- Scrutinise ledgers like repairs and maintenance and fixed asset register to ensure that no errors are made in classification of revenue/capital expenditure

- Verify physical cash in hand and match with book balances. This will help identify any imprest advances given to staff against which an expense may have to be booked. Complete reconciliation of bank balances

Consequences of not making adjustments:

- Asset liability balances will be misstated

Profits may be over or understated which may result in tax and other regulatory issues

The errors will also iimpact the opening balances of the next year, and may result in similar issues/errors in next year