? 1. Introduction

Financial statements should be prepared on an accruals basis. This is so that transactions and events are recognised when they occur (even if the resulting cash receipts and payments occur in a different period) and they are recorded in the accounting records and reported in the financial statements of the period to which they relate.

We have already seen that the gross profit for a period should be calculated by matching sales and the cost of goods sold. ln the same way, the profit for the year for a period should be calculated by charging the expenses which relate to that period. In order to ensure income and expenditure is recorded in the correct period, it is often necessary to make some adjustments before the financial statements are finalized.

The double entry for any accrual or prepayments adjustments must be reversed at the very beginning of next period. The reversal will give an opening balance for the expense account or income account.