What are Adjustments

In financial accounting, adjustments are transactions relating to the business, which have not yet been journalised.

These are incorporated into accounting by making mathematical adjustments to the figures in the trading account, profit and loss account and balance sheet at the time of making up final accounts.

To know what adjustments are to be made in relation to a transaction, we need to know the journal entry that we use to record that transaction.

Even in Funds Flow analysis, adjustments are transactions relating to the business.

However, they are transactions which have already been journalised.

They represent transactions relating to the business which might have brought about a change in (influenced) working capital (Fund).

To know the influence of a transaction, we need to know the journal entry that we use to record that transaction.

In Funds flow analysis, we identify the changes in working capital from the changes in non-current accounts. The balance sheets provide us only the figures of opening and closing balances in the Non-Current accounts.

The opening figure after going through none or more changes during the period for which funds flow is being measured, would end up as the closing figure.

Analysing funds flow is analysing the reasons for the change in balances of non-current accounts. Therefore, to analyse funds flow we need the information relating to the accounting transactions that have brought about a change in the balances.

We consider the journal entry relating to each transaction given under adjustments, find out the affect of the transaction on the non-current account and thereby identify the changes in working capital on account of that transaction.

For this we prepare a working notes by building the non-current ledger accounts (on a memorandum basis) and posting each transaction to enable us to explain the difference between the opening and closing balance.

If the difference still remains unexplained, we make proper assumptions to explain the remaining difference.

While making up the journal entries, considering Profit and Loss a/c for nominal accounts in case of cross transactions and Profit and Loss Appropriation a/c for nominal accounts in case of non-cross transactions which are not cross transactions would be helpful.