Balance day adjustments

Balance day adjustments are adjustments that need to be made on some accounts at the end of the financial year, so that they accurately reflect the position of the business. These are only required when a company is using an accrual accounting system, as income or expenses may be recognised and paid/received at different times.

Recognising income

Generally income is considered to be earned when the right to receive the income arises. When goods are sold for cash, the sale is recorded in the accounting period in which the sale is made. Credit sales are not so straight forward. If goods are sold on credit on 20 June 2008 but the account is not paid until 15 July 2008 the sale is still recognised on 20 June 2008. This means it is included as income for the period ended 30 June 2008 and not when the money is received.

See figure below:

diagram summarising when income is earned and recognised

Recognising expenses

The same principle applies to expenses. For example if a business pays its electricity bill for the month ending 30 June 2008 on 10 July 2008, this would be treated as an expenses for the period ended 30 June 2008 as there has been a consumption or decrease of future economic benefits in June 2008.

See figure below:

diagram summarising when income is earned and recognised

Need for Balance day Adjustments

To ensure all income and expenses that relate to the current financial reporting period are identified and properly reported in the current period, it is necessary to make certain adjustments in the accounting records.

Most small businesses will not have many balance day adjustments to make, as large accounts such as insurance are usually paid on a monthly basis and most computerised payroll systems calculate leave liabilities with each pay calculation.

The most common balance day adjustments used in small business are:

In determining what balance day adjustments need to be made at the end of an accounting period, the issue of materiality needs to be considered.

AASB 1031 Materiality accounting doctrine states that only material of significant information should be revealed in the preparation of financial reports. For further detail go to www.aasb.gov.au and look at the Table of Standards. This contains links to further information on each of the standards.