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Adjusted Trial Balance

Transactionsomittedrelatetothecurrentyearmustbeenteredinbooks.Ifatransactionenteredisnot relatedtothecurrentyear,fullyorpartly,thatportionofincomeorexpensemustbeexcluded.This processismadethroughadjustmententriesinthebooksofaccounts.Ifweignoretomakethenecessary adjustments,thetrading,profit&lossaccountsdonotshowthetrueprofitorlossandinconsequence balancesheetfailstodepicttruefinancialpositionofthebusiness.Thissituationdefeatstheverypurpose offinalaccounts.Hence,adjustmententriesplayanimportantroleinpresentingcorrectpictureof accounts.

Closing Stock
Everyconcernpreparesalistofunsoldgoodsattheendoftheperiodandputsvalueagainstit.Itistobe rememberedthatstockisvaluedatcostormarketprice,whicheverisless. "Asset" BalanceSheet>creditside TradingAccount>creditside

Closingstockappearingintrialbalance,willnotbeshownonthecreditsideoftheTradingAccountbut willbeshownontheassetssideoftoBalanceSheetonly.

Outstanding Expense
Therearecertainexpenses,whichhavebeenincurredbutnotpaid.Theseexpensesarecalledoutstanding expenses.Examplesareoutstandingrent,outstandingsalaryorwagesetc. "Liability" BalanceSheet>debitside P&LAccount>debitside::Add

Prepaid Expenses
Thoseexpenseswhichhavebeenpaid,infull,buttheirutilityorbenefithasnotexpiredduringthe accountingperiodarecalledprepaidorunexpiredexpenses.Inotherwords,amounthasbeenpaideven fortheperiodsubsequenttothebalancesheetdate.Examplesisprepaidinsurancepremium,rentetc. "Asset" BalanceSheet>creditside P&LAccount>creditsideORdebitside::Less

Income Received in Advance (Unearned Income)

Examplerentreceivedinadvance,feereceivedfromstudents,subscriptionreceivedetc. "Liability" BalanceSheet>debitside P&LAccount>debitsideorcreditside::Less

Accrued Income
IncomeearnedbutnotreceivedduringtheaccountingperiodiscalledaccruedIncome.Exampleisinterest oninvestments. "Asset" BalanceSheet>creditside P&LAccount>creditside

Depreciation
Thevalueoffixedassetsgoesonreducingyearbyyearbecauseofwear,tearandeffluxoftime.Thisfall inthevalueshouldbetreatedasalossorexpense,tobeconsideredbeforeprofitorlossisascertained. ThevaluetobeshownintheBalanceSheetmustalsobe,suitably,reduced. "Liability" BalanceSheet>debitsideorcreditside::Less P&LAccount>debitside

DepreciationappearinginTrialBalance: IfdepreciationaccountappearsinTB,itmeansthatdepreciationisalreadywrittenoffandadjustedin concernedassetaccount.Sinceitsalosstothebusiness,itmustbetakentoPLaccount. ProratadepreciationWhilecomputingdepreciation.theperiodforwhichtheassetisusedshouldbekept inmind.

Interest on Capital
Interestoncapitalwilltreatlikeotherexpensesanddebittotheprofitandlossaccount. "Liability" BalanceSheet>debitside P&LAccount>debitside

Interest on Drawing
"Asset" BalanceSheet>creditsideordebitside::LessfromCapital P&LAccount>creditside

Interest on Loan
"Liability" BalanceSheet>debitside P&LAccount>debitside

Classification of Debtors

Oncegoodsaresoldoncredit,debtorsappearinaccounts.Inplaceofdebtors,billsreceivablemayalso appear.Debtorsandbillsreceivablerepresenttheamountstobereceivedbythefirmforthecreditsales made.Alldebtorsandbillsreceivablemaynotberealizable.Whererecoveryisimpossible,thoseamounts aretobewrittenofasbaddebts.Againstlikelybaddebts,provisionisrequiredtobemade.Bothbad debtsandprovisionforbaddebtsreducetheprofitsofthefirm.

Bad Debts
**Loss** BalanceSheet>debitsideorcreditside::Less P&LAccount>debitside

Provision for Bad / Doubtful Debts

Prudentaccountingprincipleistomakeprovisionforexpectedlossesandnottotakecreditforexpected profits. Allcreditsaleswouldnotberealizedintheyearinwhichthesalesaremade.Salesmaybemadeinone yearandactualrealizationsmayhappeninthesucceedingyear.Afirm,therefore,makesprovisionatthe endoftheaccountingyear,forlikelybaddebts,whichmayhappenduringthecourseofthenextyear.The simplereasonisallcollectionsdonotoccurinthesameyearinwhichsalesaremade.Somesalesare likelytobecomebadinthecourseofthenextyear.So,thepropercoursewouldbetochargesuchlikely baddebtsinthataccountingyearinwhichsaleshavebeenmade,since,theprofitonsuchsaleshasbeen consideredintheyearinwhichthesaleshavebeenmade. ProvisionforBadandDoubtfulDebtsistobecalculatedonthatamountofdebtors,afterdeductingbad debts.ProvisionforBadandDoubtfulDebtsisnottobecalculatedonthetotalamountofdebtors. Showbaddebtsandprovisionforbadanddoubtfuldebts,separately,inProfitandLossAccount.Donot clubthemup.

Provision for Discount on Debtors

Itisveryimportanttonotethatprovisionfordiscountondebtorsiscalculatedonthebalanceofthe amountofsundrydebtorsafterdeductingtheprovisionforbad&doubtfuldebts.Itisbecauseofdiscount isallowedonlytogooddebtors. **Loss** BalanceSheet>debitsideorcreditside::Less P&LAccount>debitside

Provision for Discount on Creditors

Discountsreceivedfromthecreditorsareincomeofthebusiness. "Asset" BalanceSheet>creditsideordebitside::LessfromCreditors P&LAccount>creditside

Accident Losses
Stockofgoodsmayalsobedestroyedordamagedbyfire,etc.Asaresult,thevalueoftheclosingstock willbelowerthanotherwise.Thiswillreducetheamountofthegrossprofitand,inturn,netprofit, automatically.

Sundaram&Co.hasloststocksinafireaccidentRs.50,000.AmountadmittedbyOrientalFireinsurance companyunderthefireinsurancepolicyisRs.35,000.Theclaimamountisyettobereceivedfromthe insurancecompany.ShowthepresentationintheTrading,ProfitandLossAccountandBalanceSheet.

Commission Payable to Net Profits

Sometimes,Companymayprovideanincentivetothemanagerintheformofcommissiononprofitsto improveprofitabilityofthecompany. "Liability" BalanceSheet>debitside P&LAccount>debitside Kalyan&Co.agreestopayacommission5%onnetprofitstoitsmanager.Theprofitbeforecommission isRs.80,000.Thecommissionhasnotyetbeenpaidbythecompanytoitsmanager.

PBC=80,000 C=PAC*5/100 PAC=PBCC PAC=76190

Closing Entries
ClosingEntriesareessentialtoascertainthecorrectoperatingresults.Accountsrelatingtoexpensesand incomesaretobeclosedtofindouttheoperatingprofit.So,balancesintheexpensesandincome accountshavetobetransferredtoTradingandProfitandLossAccounts.Processofclosingexpenses andincomeaccountsisdonethroughclosingentries.