Simple financial statements include the income statement and balance sheet. It is prepared without any adjustment. It is suitable when there is not any adjustment. For example, a medical practitioner pays all expenses and gets all earning in cash. So, such business, we need not make any adjusted financial statements. But, we are taking a big company in which you have to work as accountant. You have to prepare only adjusted financial statements instead of simple financial statements.
In adjusted financial statements, we include all the adjustments of transactions which either we did not pass at the end of year or we have done any mistake or mistakes. So, for showing the financial statements as true and fair view of company's position, we need to prepare adjusted financial statements.
Now, learn the steps of preparing adjusted financial statements
1st Step : Collect Information
Without raw data, we can not make adjusted financial statements. Collect the information of ledger balances from unadjusted trial balance. There is also need of prepared journal, ledger accounts, payment and receipt deadline schedules and vouchers. Upto the end of the year, collect all the bills, receipts, vouchers and memos. Analyze them.
2nd Step : Analyze the Collected Information
You will find following facts from these collected information.
a) There are lots of transactions which shows in the vouchers but not in the books.
b) When we have studied the bills, there are lots of bills which tells us the advance payments. All advance payments whose services, we have to get after our financial year will not be our expense but after passing payment entry, it is necessary to deduct advance expenses from related expenses in income statement. Show advance expenses in the current assets in balance sheet.
c) When we have studied our payment deadline schedule and journal, we find that there are lots of expenses which we have to pay upto end of the financial period, but we did not pay. So, our journal is not showing this but whether we have paid these expenses or not, we have obtained the service. So, it is our duty to add these outstanding expenses in paid expenses in income statement. Show outstanding expenses in the liability side of balance sheet.
d) When we have studied our receipt deadline schedule and journal, we find that there are lots of incomes which have to receive in next year but our customer has paid us advance. So, this is our advance incomes. We have received the income but we did not give the service, so, this is not income of this year. We have to deduct these advance income from incomes of current year in income statement Show advance incomes in the liability side of balance sheet.
e) When we have studied our receipt deadline schedule and journal, we find that there was the time when we have to receive any income but we did not receive. There is also no chance of receiving the income at the end of year. So, we have to add these outstanding incomes in received incomes in income statement. because we have given the services, so it will be the income of our current year. Show outstanding expenses in the asset side of balance sheet.
2nd Step : Create Reserves and Provisions
Different companies create different reserves and provisions for surviving business in case actual loss due to mis-happening. Because we are passing it in the end of year, so there is need to adjust income statement with this. In this, we can include provision for bad debts, provision for discount on debtors. Deduct reserves and provisions out of a particular asset in the balance sheet.
3rd Step : Adjust the Losses
It is general saying, there is no time of death. Like there is also saying, there is no time when will be mis-happening in business. We have to cover these losses out of our incomes. Only after this, we will be able to give the dividend to our shareholders. So, make the list of all losses which happened due to different accidents but we did not treat in the books of accounts.
In income statement, we show these losses in expense side if there is not any insurance. If there is insurance, we will show only receivable insurance claim in asset side. We also decrease our asset. If this is stock, we will deduct loss of stock from purchase in trading account.
4th Step : Adjust Accounting Errors
When we have made trial balance, our internal auditor may find some accounting mistakes. We have to rectify all these mistakes. Its affect will be in income statement and balance sheet.
5th Step : Study the Usual Adjustments
Following is the chart in which your can learn usual adjustments which you should need to do for preparing adjusted financial statement.
In adjusted financial statements, we include all the adjustments of transactions which either we did not pass at the end of year or we have done any mistake or mistakes. So, for showing the financial statements as true and fair view of company's position, we need to prepare adjusted financial statements.
Now, learn the steps of preparing adjusted financial statements
1st Step : Collect Information
Without raw data, we can not make adjusted financial statements. Collect the information of ledger balances from unadjusted trial balance. There is also need of prepared journal, ledger accounts, payment and receipt deadline schedules and vouchers. Upto the end of the year, collect all the bills, receipts, vouchers and memos. Analyze them.
2nd Step : Analyze the Collected Information
You will find following facts from these collected information.
a) There are lots of transactions which shows in the vouchers but not in the books.
b) When we have studied the bills, there are lots of bills which tells us the advance payments. All advance payments whose services, we have to get after our financial year will not be our expense but after passing payment entry, it is necessary to deduct advance expenses from related expenses in income statement. Show advance expenses in the current assets in balance sheet.
c) When we have studied our payment deadline schedule and journal, we find that there are lots of expenses which we have to pay upto end of the financial period, but we did not pay. So, our journal is not showing this but whether we have paid these expenses or not, we have obtained the service. So, it is our duty to add these outstanding expenses in paid expenses in income statement. Show outstanding expenses in the liability side of balance sheet.
d) When we have studied our receipt deadline schedule and journal, we find that there are lots of incomes which have to receive in next year but our customer has paid us advance. So, this is our advance incomes. We have received the income but we did not give the service, so, this is not income of this year. We have to deduct these advance income from incomes of current year in income statement Show advance incomes in the liability side of balance sheet.
e) When we have studied our receipt deadline schedule and journal, we find that there was the time when we have to receive any income but we did not receive. There is also no chance of receiving the income at the end of year. So, we have to add these outstanding incomes in received incomes in income statement. because we have given the services, so it will be the income of our current year. Show outstanding expenses in the asset side of balance sheet.
2nd Step : Create Reserves and Provisions
Different companies create different reserves and provisions for surviving business in case actual loss due to mis-happening. Because we are passing it in the end of year, so there is need to adjust income statement with this. In this, we can include provision for bad debts, provision for discount on debtors. Deduct reserves and provisions out of a particular asset in the balance sheet.
3rd Step : Adjust the Losses
It is general saying, there is no time of death. Like there is also saying, there is no time when will be mis-happening in business. We have to cover these losses out of our incomes. Only after this, we will be able to give the dividend to our shareholders. So, make the list of all losses which happened due to different accidents but we did not treat in the books of accounts.
In income statement, we show these losses in expense side if there is not any insurance. If there is insurance, we will show only receivable insurance claim in asset side. We also decrease our asset. If this is stock, we will deduct loss of stock from purchase in trading account.
4th Step : Adjust Accounting Errors
When we have made trial balance, our internal auditor may find some accounting mistakes. We have to rectify all these mistakes. Its affect will be in income statement and balance sheet.
5th Step : Study the Usual Adjustments
Following is the chart in which your can learn usual adjustments which you should need to do for preparing adjusted financial statement.
Related : Step by Step Accounting Guide
Comments