Adjustments For Final Accounts

Question 1

Why are adjustments needed?

Answer 1

So that the expenses and income shown for the final accounts will be equal to the the revenue and expenses incurred during the financial period. (Matching concept)

Question 2

Differenciate between capital invested and capital employed

Answer 2

Capital Invested: The actual amount of money brought into the business by the owner from outside interest. Not influenced by profits/losses

Capital Employed: The effective of money used in the business

Question 3

Explain the application of the prudence concept in the need for adjustments

Answer 3

Revenue and profit should not be anticipated but should only be included in the profit and loss account when realised in the form of cash or assets. Provision must be made for all known expenses, losses and liabilities