Adjustments in Final Accounts
1. Closing Stock:
A) TRADING ACCOUNT – CR
SIDE
B) BALANCE SHEET –
ASSETS (DR)
But, if closing
stock is given in trial balance, then it means that closing stock is
adjusted (i.e., deducted with purchases). In such case closing stock is shown
as Assets only.
Note: Closing stock is always valued at cost of market
price whichever is lower (Convention of Conservatism)
2. Outstanding Expenses / Expenses
Payable:
A) ADDED WITH RELATED
EXPENSES
B) SHOWN AS LIABILITY
IN THE BALANCE SHEET
If Outstanding expenses is given in
trial balance (cr. Side), then it is shown directly in the balance sheet as
liability.
3. Prepaid Expenses / Advance expenses
paid / Unexpired Expenses or Expenses Carried forward:
A) DEDUCTED WITH
EXPENSES
B) SHOWN AS AN ASSET IN
THE BALANCE SHEET
If prepaid expenses is given in trial
balance (dr. side), then it is shown directly in the balance sheet as an asset.
4. Accrued Income / Income receivable /
Income not yet received:
A) ADDED WITH RELATED
INCOME
B) SHOWN AS AN ASSET IN
THE BALANCE SHEET
If accrued income is given in the
trial balance (dr. side), then it is shown directly in the balance sheet as an
asset.
5. Income received in advance / Income
not yet earned:
A) DEDUCTED WITH
RELATED INCOME
B) SHOWN AS A LIABILITY
IN THE BALANCE SHEET
If income received in advance is
given in the trial balance (cr. Side), then it is shown directly in the balance
sheet as a liability.
Adjustments relating to loss of Goods (without any
insurance claim)
1. Loss by fire / Loss by theft / Loss
due to accident:
A) DEDUCTED WITH PURCHASES IN
TRADING ACCOUNT
B) FULL AMOUNT DEBITED TO PROFIT AND LOSS
ACCOUNT
2. Goods distributed as free sample
A) DEDUCTED WITH PURCHASES IN
TRADING ACCOUNT
B) FULL AMOUNT DEBITED TO PROFIT AND LOSS
ACCOUNT - ADVERTISEMENT
3. Charity / Donation of Goods
A) DEDUCTED WITH PURCHASES IN
TRADING ACCOUNT
B) FULL AMOUNT DEBITED TO PROFIT AND LOSS
ACCOUNT – CHARITY/DONATION
4. Goods given as salary
A) DEDUCTED WITH
PURCHASES IN TRADING ACCOUNT
B) FULL AMOUNT DEBITED
TO PROFIT AND LOSS ACCOUNT - SALARY
(IF ALL OF THE ABOVE MENTIONED FOUR POINTS ARE GIVEN IN
TRIAL BALANCE [DR], THEN THEY ARE DEBITED TO PROFIT AND LOSS ACCOUNT)
5. Goods withdrawn for personal use of
the proprietor
A) DEDUCTED WITH
PURCHASES IN TRADING ACCOUNT
B) FULL AMOUNT DEDUCTED
WITH CAPITAL IN BALANCE SHEET - DRAWINGS
Adjustments relating to loss of Goods (with insurance
claim)
1. If there is insurance claim against
loss of goods, then there can be two situations:
SITUATION 1) Loss by fire or any other
losses are given in adjustment
1. TOTAL LOSS DEDUCTED
WITH PURCHASES
2. NET LOSS AFTER
DEDUCTING INSURANCE CLAIM IS DEBITED TO PROFIT AND LOSS ACCOUNT
3. INSURANCE CLAIM
RECEIVABLE IS SHOWN AS AN ASSET IN THE BALANCE SHEET.
For example: Adjustment given as -
Loss by fire Rs. 10,000 (Insurance claim = 7,000)
Treatment in Final Accounts
1. 10,000 deducted with
purchases in trading account.
2. Net loss of Rs.
3,000 (10,000 – 3,000) is debited to profit and loss account.
3. Insurance claim Rs.
7,000 shown as an asset.
SITUATION 2) Loss by fire or any other
losses are given in trial balance
1. TOTAL LOSS
DEDUCTED WITH PURCHASES (ALREADY DEDUCTED SINCE GIVEN IN
TRIAL BALANCE)
2. NET LOSS AFTER
DEDUCTING INSURANCE CLAIM IS DEBITED TO PROFIT AND LOSS ACCOUNT
3. INSURANCE CLAIM
RECEIVABLE IS SHOWN AS AN ASSET IN THE BALANCE SHEET.
For example:
Trial Balance as on -----------
|
Particulars |
Amount |
Particulars |
Amount |
|
Loss by
fire |
10,000 |
|
|
Adjustments: Insurance Claim = Rs.
7,000
Treatment in Final Accounts:
1. Net loss of Rs.
3,000 (10,000 – 7,000) is debited to profit and loss account.
2. Insurance claim
receivable Rs. 7,000 is shown as an asset in balance sheet.
Treatment of Bad debts and Provision
for Bad debts in Final Accounts
This adjustment can be clearly understood
with the help of illustration given in the video.
Adjustments relating to Errors of Omission
1. Credit Sales Omitted:
A) ADDED WITH SALES
B) ADDED WITH DEBTORS
2. Credit Purchase Omitted:
A) ADDED WITH PURCHASES
B) ADDED WITH CREDITORS
3. Purchase of fixed assets Omitted:
A) ADDED WITH FIXED
ASSETS
B) DEDUCTED WITH CASH
IN CASE OF CASH PURHCASE OR PURHCASE AMOUNT SHOW AS LIABILITY
4. Sale of fixed assets omitted:
A) DEDUCTED WITH FIXED
ASSETS (BOOK VALUE)
B) ADDED WITH CASH
(SALE VALUE)
C) DIFFERENCE OF BOOK
VALUE OR SALE VALUE IS PROFIT OR LOSS AND IT IS SHOWN IN PROFIT AND LOSS
ACCOUNT.
Adjustments relating to Errors of Principles
1. Wages includes Rs. 5,000 spent on
construction of building:
A) DEDUCTED WITH WAGES
IN TRADING ACCOUNTING
B) ADDED WITH BUILDING
IN BALANCE SHEET
2. Legal Expenses includes Rs. 10,000
paid for acquisition of Land:
A) DEDUCTED WITH LEGAL
EXPENSES
B) ADDED WITH LAND IN
BALANCE SHEET
3. PURCHASE OF FURNITURE ADDED WITH
PURCHASES
A) DEDUCTED WITH
PURCHASES
B) ADDED WITH FURNITURE
AND AFTER THAT DEPRECIATION IS CHARGED ON FURNITURE
Adjustments relating to Partnership firms
1. Interest on capital
A) DEBITED TO P/L
APPROPRIATION ACCOUNT
B) ADDED WITH PARTNER’S
CAPITAL
2. Partner’s salaries, bonus, fees and
commission
A) DEBITED TO P/L
APPROPRIATION ACCOUNT
B) ADDED WITH PARTNER’S
CAPITAL
NOTE: IF BOTH OF THE ABOVE GIVEN IN TRIAL BALANCE, THEN IT
IS SHOWN IN P/L APPROPRIATION ACCOUNT ONLY.
3. Interest on drawings
A) DEBITED TO P/L
APPROPRIATION ACCOUNT
B) DEDUCTED WITH
PARTNER’S CAPITAL
4. Transfer to general reserve
A) DEBITED TO P/L
APPROPRIATION ACCOUNT
B) SHOWN AS LIABLITY
IF GENERAL RESERVE IS
GIVEN IN TRIAL BALANCE, THEN IT IS SHOWN DIRECTLY IN BALANCE SHEET.
IF GENERAL RESERVE IS
GIVEN IN BOTH TRIAL BALANCE AND ADJUSTMENTS, THEN:
A) TRANFER TO RESERVE
IS DEBITED TO P/L APPROPIRATION ACCOUNT
B) IN BALANCE SHEET,
TRANSFER TO RESERVE IS ADDED WITH THE AMOUNT ALREADY GIVEN IN TRIAL BALANCE
SHEET.
5. Interest on partner’s loan
A) DEBITED TO PROFIT
AND LOSS ACCOUNT
B) ADDED WITH PARTNER’S
LOAN IN BALANCE SHEET
NOTE: ACCORDING TO INDIAN PARTNERSHIP ACT, INTEREST ON
PARTNER’S LOAN IS COMPULSARILY CHARGED @ 6% P.A. IF NO OTHER RATE IS GIVEN IN
THE QUESTION.
Depreciation
Depreciation
is given either in trial balance or as an adjustment. If depreciation is given
as an adjustment, then:
A) It is debited to Profit and loss
account
B) Deducted with Assets in Balance
Sheet
But if depreciation is given in trial
balance:
A) If debited in trial balance –
Debited to Profit and loss account
B) If credited in trial balance –
Deducted with assets with balance sheet together with depreciation given in
adjustment.
Insurance
Insurance is of two types: General
Insurance and Life Insurance.
1. General insurance is given as
Insurance in Trial balance and is debited to profit and loss account. If time
of expiry of insurance is given in the trial balance, then unexpired insurance is
deducted in profit & loss account with insurance and shown as an asset in
balance sheet. (Refer video for better understanding)
2. Life insurance is deducted with
capital in balance sheet.
Treatment of Deferred revenue
expenditure
Deferred revenue expenditure are those whose benefits are expected to
realised over more than one accounting year. Examples of deferred revenue
expenditures are: Advertisement, preliminary expenses. These expenses are
written off over the period of benefit or proportion to be written off will be
given in question.
For example: Advertisement given in trial balance Rs. 10000. Adjustment given
that 1/5 of advertisement is to be written off.
In such case, 1/5th of 10000 are debited to profit & loss
account and remaining 8000 is shown as an asset.
Lease and patents
Payments for lease and patents are made for a fixed period and it is to
be written off over the period for which it is to be obtained.
For example, Lease hold land (10 years) Rs. 1,00,000 is given in trial
balance.
In such a case, 1/10th of leasehold land i.e., Rs. 10,000 is
debited to profit and loss account and remaining amount will be shown as an
asset.
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