Before closing the ledger accounts, if the error is found you can rectify it without opening a suspense account. However, after closing the accounts, if the error is found you can record an accounting entry in the General Journal and post it to the relevant ledgers. If the amounts are significant, you can disclose the accounting entry as an adjustment in the opening balance of the ledgers.
Adjusting Entries
Final Accounts are the accounts that are prepared at the end of the trading year. These accounts show the final results of the business carried out. Final accounts are prepared to find out the profit earned or loss sustained by a concern.
Post to retained earnings:
If the rectification requires posting to nominal accounts*, post the amounts to retained earnings instead of the ledger account.
*(Nominal accounts include company’s income and expenditure accounts that are closed at the end of each accounting year)
To ensure the current year’s profit and loss is not affected, prepare a profit and loss adjustment account.
Transfer the balance of the profit and loss adjustment account to the profit and loss account.
Disclose prior period items separately in the financial statements.
Prepare a profit and loss adjustment account
At the end of the accounting year, all ledger accounts are balanced and then a trial balance is prepared. From the trial balance, final accounts, i.e. trading, profit, and loss account, and balance sheet are drawn. While preparing trading and profit and loss accounts, all expenses and incomes for the full period are to be taken into consideration. If expenses have been incurred but not paid or income is due but not received, necessary entries are required to be passed to show the correct picture of the business. These entries are called “Adjusting Entries’.
Closing Entries
At the end of the cash year, all accounts of expenses and incomes must be closed. The balance of these accounts is transferred to the trading account and profit and loss account. The entries passed to transfer these balances are called “Closing entries”.
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