To ensure the truth of trading results in the final accounts, it is important to take into account all expenses incurred and any losses. The incomes and profits earned during the period of the trading and profit & loss account must be also recorded, this site.
In the mercantile method of accounting, different accounts must be adjusted before final accounts can prepared. It is not uncommon to adjust expenses paid ahead, incomes earned in advance income accrued but un received income, bad debts and provision for bad debts. These adjustments are accomplished by adjusting entries.
Certain expenses for a given period may not be paid in the current accounting period. All outstanding and unpaid expenses, which are due in one accounting period but not paid in that accounting year or postponed payments of, are eligible for payment. All such expenses should be accounted for regardless of whether they were paid or not. All unpaid and paid expenses must be recorded in an account year if they pertain to the same accounting year. In other words, if salaries are not paid for the past month, there will be no entry in books of account unless they are. Profit and loss accounts for salaries will therefore be less than actual expenditure. Therefore, profit will be greater.
Some of the expenses will have a benefit in the next accounting year. Because these expenses are for future periods, they will not affect the final accounts. For true profit to be realized, it is necessary to adjust such prepaid expenses in the books. Insurance, taxes and telephone subscriptions are some examples. Rent is another example. Rent is paid in advance. This means that adjustments may be required, e.g. Rent for one year paid by x on 1.7.79; his accounting year will be calendar year. So rent for 6 months will not expire and will be due the following year.
You might have earned incomes during the year, but not received them until the end. Income such as rental, rent and commissions are some examples. normally earned by merchants in a specific accounting period but not received. These income items should be adjusted before final accounts are prepared. All such incomes should go to the relevant income account. In the same way, income that has been earned but not yet received can be considered an asset since it still needs to be received.