Page 1 :
Ranker’s Academy, (A Leading Institute of Accountancy, Business Studies and Economics for XI & XII), Chapter – 10, , FINANCIAL STATEMENTS - II, Final accounts with adjustments – It is quite usual that some of the expenses paid or incomes received, during the accounting period may relate to the previous year or to the subsequent year. If these items, are not adjusted into the accounts, the summary presented in the form of final accounts will not give a, true picture. All items which need alteration or which are to be brought into records at the time of, preparation of final accounts are called adjustments., 1. Closing stock – The adjustments regarding closing stock are:, a. It is credited to trading account., b. It is shown as an asset in the balance sheet., , Dr, , Closing Stock a/c, To Trading, a/c in the Trial, Adjusted Purchase and Closing Stock – Sometimes the closing stock may, be included, , Balance itself. That means the opening and closing stock have been adjusted in the purchases. Here, the opening stock will not appear in the Trial balance. The trial balance will show only the figures of, adjusted purchases and closing stock., Adjusted Purchases = Purchases + Opening Stock – Closing stock, Hence, only the adjusted purchases are shown on the debit side of the trading account and closing, stock will appear only on the asset side of the balance sheet., 2. Outstanding expenses – Expenses which have been incurred and are due for payment, but, have not yet been paid during the accounting period is called outstanding expenses. (Due but, not paid) E.g., Rs.1000 per month is paid salary to an employee, but altogether only Rs.11000, has been paid during this year, here one month salary Rs.1000 is due but not paid and is called, outstanding salary. In order to find the true profit for the year this outstanding amount is to be, brought into accounts. This is actually an expense for the year as well as a liability too., Adjustment entry regarding this item is as follows:, Concerned expenses a/c (Salary a/c), Dr, To Outstanding expenses a/c (O/s salary a/c), The effect of the above adjustment will be:, a. Outstanding expenses will be debited to trading and profit and loss a/c by way of addition to, the concerned expense., b. Outstanding expenses will be shown on the liability side of the Balance Sheet., 3. Prepaid expenses – Those expenses which have been paid in advance, whose benefit will be, available in future are called unexpired or prepaid expenses. (Paid but not due). E.g., Prepaid, insurance, Prepaid rent etc., Adjustment entry:, , Prepaid expense a/c Dr, To Concerned expense a/c, The effect of the above adjustment will be:, Add. 14-A, Anupam Nagar, Govindpuri-Gwl., , ACCOUNTING-11, , CHAPTER-10, , Page 1

Page 2 :
Ranker’s Academy, (A Leading Institute of Accountancy, Business Studies and Economics for XI & XII), a. It will be deducted from the respective expense on the debit side of trading and profit and, loss account., b. It is shown as an asset in the Balance sheet, 4. Accrued Income or outstanding income – Income which have become due during the, accounting period but the same has not been received are called accrued income. (Income due, but not received). E.g., Accrued Interest on bank deposit, Accrued commission etc., Adjustment entry:, , The effect of the above adjustment will be:, a. It will be shown on the credit side of the profit and loss a/c by way of addition to the income., b. It will be shown on the asset side of the Balance Sheet as Accrued Income., 5. Income received in advance – A portion of the income received during the current year may, relate to the future period is called Unearned income or income received in advance., (Received but not due). E.g., Rent received in advance, commission received in advance., Adjustment entry:, Concerned Income a/c, Dr, To Income received in advance a/c, The effect of the above adjustment will be:, a. It will be deducted from concerned income on the credit side of T&P/L a/c., b. It is shown as a liability in the Balance Sheet., 6. Depreciation – Depreciation is the decrease in the value of an asset due to wear and tear,, passage of time etc. This is an operating expense to the business. And to arrive at the correct, profit or loss made by the business, it should be charged (debited) to profit and loss a/c., Adjustment entry:, Depreciation a/c, , Dr, To Concerned Asset a/c, , The effect of the above adjustment will be:, a. Depreciation is shown on the debit side of profit and loss account., b. It is shown on the assets side of the Balance Sheet by way of deduction from the concerned, asset., 7. Bad debts – Any irrecoverable portion of sundry debtors is terms as bad debts. If bad debt is, given outside the trial balance (given as adjustment), it is termed as further bad debt. It may so, happen that a debt becomes bad after the preparation of Trial Balance., Adjustment entry:, Bad debt a/c, Dr, To Debtors A/c, Add. 14-A, Anupam Nagar, Govindpuri-Gwl., , ACCOUNTING-11, , CHAPTER-10, , Page 2

Page 3 :
Ranker’s Academy, (A Leading Institute of Accountancy, Business Studies and Economics for XI & XII), The effect of the above adjustment will be:, a. It should be shown on the debit side of the profit and loss account as it is a loss to the, business., b. It should be deducted from Sundry debtors on the assets side of the Balance Sheet as it is, irrecoverable., Note: If the bad debt is given in the trial balance, it means that it has already been adjusted, with the sundry debtors and hence, need not be deducted from sundry debtors again while preparing, the balance sheet, but it should be shown on the debit side of profit and loss account only., 8. Provision for bad and doubtful debts - When it is feared that some of the amounts owed by, customers are not likely to be collected, it is prudent to recognize the expected loss by reducing, the current year’s profit and placing the amount in a special account called “Provision for bad, and doubtful debts a/c”. This provision is created out of profit and hence, the Adjustment, entry will be:, Profit & Loss a/c, , Dr, , The effect of the above adjustment will be:, a. It will be shown as an addition to Bad debt on the debit side of Profit and loss a/c., b. It should be deducted from sundry debtors on the assets side of the Balance Sheet., , 9. Provision for discount on debtors – Cash discount may be granted to customers to ensure, prompt payment of their dues. A provision for this purpose is created out of the profits and it, is calculated as certain percentage on good debtors. Therefore,, Good debtors = Sundry debtors – Further bad debt – provision for doubtful debts, Adjustment entries:, D, Profit and Loss a/c, To Provision for discount of debtors a/c, The effect of the above adjustment will be:, a. The amount of provision for discount on debtors should be debited to profit and loss a/c., r, b. It should be shown by way of deduction from sundry debtors in the balance sheet after, deducting further bad debt and new provision for debtors., 10. Manager’s commission – Sometimes the managers are paid a commission calculated as a, certain percentage on the profit. Such commission may be ‘before charging such commission’, or ‘after charging such commission’., , Add. 14-A, Anupam Nagar, Govindpuri-Gwl., , ACCOUNTING-11, , CHAPTER-10, , Page 3

Page 4 :
Ranker’s Academy, (A Leading Institute of Accountancy, Business Studies and Economics for XI & XII), The procedure for calculation of commission before charging such commission:, a. Find out the difference between credit side and debit side of profit and loss a/c. This, represents the notional profit., b. Multiply this amount by the given percentage. E.g., Notional profit is Rs.26000 and the, manager is to be given 5% commission of the profit before charging such commission, it, will work out as under: 26000 X 5/100 = 1300, The procedure for calculation of commission after charging such commission:, a. Find the notional profit., b. Assume that the profit so arrived at is inclusive of commission (i.e., if profit is 100%, the, profit inclusive of commission will be 100+% of commission)., c. Calculate the commission by applying the following equation:, Notional profit X % of commission / 100+ % of commission, E.g., Notional profit is Rs.14700, manager’s commission is 5% after charging such commission,, the commission payable will be:, 14700 X 5/105 = 700., Adjustment entry:, , The effect of the above entry will be:, a. Manager’s commission account will be closed by transfer to profit and loss account., b. The Manager’s commission account will be shown on the liabilities side of the balance sheet, as it is outstanding., 11. Interest on capital – In case the interest on capital is paid to the proprietor, it is to be treated, as an expense to the business and hence debited to profit and loss account. This interest on, capital is shown on the liability side of the balance sheet by adding the same to capital account., Adjustment entry:, Dr, Interest on capital a/c, The effect of the above adjustment will be:, To Capital a/c, a. It will be debited to profit and loss account as a separate item., b. It will be added to capital on the liability side of the balance sheet., , Add. 14-A, Anupam Nagar, Govindpuri-Gwl., , ACCOUNTING-11, , CHAPTER-10, , Page 4

Page 5 :
Ranker’s Academy, (A Leading Institute of Accountancy, Business Studies and Economics for XI & XII), Treatment for various types of adjustments:, Adjustment, , Adjustment Entry, , Treatment in, Trading and Profit, and Loss Account, , Treatment in, Balance, Sheet, , 1. Closing stock, , Closing stock A/c, To Trading A/c, , Dr., , Shown on the credit Shown on, assets side and profit the assets, side, and loss account, , 2. Outstanding, expenses, , Expense A/c, To outstanding, expense A/c, , Dr., , Added to the, respective expense, on the debit side, , 3. Prepaid/, Unexpired, expenses, , Prepaid expense A/c, To Expenses A/c, , Dr., , Deducted from the, Shown on, respective expense on the assets, the debit side, side, , 4. Income earned Accrued income A/c, To Income A/c, but not, received, , Dr., , Added to the, respective income, on the credit side, , Shown on, the assets, side, , 5. Income, received in, advance, , Income A/c, To Income received, in advance A/c, , Dr., , Deducted from the, respective income, on the credit side, , Shown on the, liabilities, sides, , 6. Depreciation, , Depreciation A/c, To Assets A/c, , Dr., , Shown on the debit, side, , Deducted from, the value of, asset, , 7. Provision for Profit and Loss A/c, bad and, To Provision for, doubtful debts, doubtful debts, , Dr., , Shown on the debit, side, , Shown as, deduction, from debtors, , 8. Provision for, discount on, debtors, , Profit and Loss A/c, To Provision for, discount debtors, , Dr., , Shown on the debit, side, , Shown as, deduction, form debtors, , 9. Manager’s, commission, , Shown on the debit, side, , Shown on the, liabilities side, , 10. Interest on, capital, , Manager’s, Dr., commission A/c, To outstanding, commission A/c, Interest on capital A/c Dr., To capital A/c, , Shown on the debit, side, , Shown as, addition to, capital, , 11. Further bad, debts, , Bad debts A/c, Dr., To Sundry Debtors A/c, , Shown on the debit, side, , Deducted from, debtors, , Shown on the, liabilities side, , ***********, , Add. 14-A, Anupam Nagar, Govindpuri-Gwl., , ACCOUNTING-11, , CHAPTER-10, , Page 5