Adjustments of Final accounts - full detail in table form

There are many adjustment because earlier we have not passed any journal entry ,
so at the time of making final account we have to adjust them .
Name of
items
Adjustment entry Effect on trading and
profit and loss account
Effect on balance
sheet
1. Closing
stock
Closing stock
account dr. xxx
To trading
account xxx
Closing stock will write
in the credit side of
trading account
It will show as asset
in the final account
2.
outstanding
expenses or
expenses
payable or
expenses
due but not
paid
Expenses account
dr. xxx
To outstanding
exp. xxx
Outstanding expenses
will add in expenses . if
it is direct it will go to
trading accounts debit
side , if it is indirect
nature then it will go to
the debit side of profit
and loss account
It will be the current
liability so it will go
to the liability side of
balance sheet.
3. advance
expenses
Advance
expenses a/c dr.
xxx
To expenses
account xxx
It will deduct from
respective expenses
paid .
It will be the current
asset so it will go to
assets side of balance
sheet
4. income
receivable
Outstanding
income account
dr. xxx
To income
It will add in the
income and go to credit
side of profit and loss
account
It will show as asset
in the assets side of
balance sheet
account xxx
5. income
received in
advance
Income account
dr. xxx
To advance
income account
xxx
It will deduct from the
income received
It will shown as
liability in the
liabilities side of
balance sheet
6 Goods use
for personal
use
Drawing account
dr. xxx
To purchase
account
It will deduct from
purchase in the debit
side of trading account
= purchase drawing in
goods
It will deduct from
capital in the
liabilities side of
balance sheet
=capital- drawing in
goods
7. Destroyed
of goods
loss by fire or
accident account
Dr. xxx
To trading
If there is no
insurance
It will also go to
profit and loss
account
Profit and loss
account dr. xxx
To loss by fire /
accident
It will shown in credit
side of trading account
And also in profit and
loss accounts debit side
It will not go to
balance sheet
8. Depreciation It will go to the debit It will deduct from
Depreciation account dr. xxx
To respective
asset account
xxxx
side of profit and loss
account
fixed asset . Because
it decrease the value
of asset
=fixed asset -
depreciation
9.
provisional
for doubtful
debts
If you have make
any provision for
doubt ful debts
the its journal
entry will passed
Provision for
doubtful debt
account dr. xxx
To Bad debts
account xxx
( New bad debts
which is not
shown in trial
balance will
transfer to
provision for
doubtful debt
account )
Net value of provision
for doubtful debt
account transfer to
profit and loss
accounts debit side
=total bad debt +
closing balance or
provision of doubtful
debt or this year
provision - opening
balance of provision for
doubtful debts
Deduct from debtor
= debtor new bad
debts this year
provision or closing
balance of provision
for bad debts
10.
Commission
to manager
Commission
account dr. xxx
To outstanding
It will shown in the
debit side of profit and
loss account as o/s
It will shown as
liability
commission commission to
manager
If it charge on the
amount after charging
such commission then
we will calculate
= profit before
commission X Rate/
100+rate

Trial Balance used in Final Accounting : When Prepared?


The Trial Balance is a statement of ledger account balances as on a particular date
(instance).
Final Accounting is done towards the end of the accounting period.
The trial balance that we consider in the preparation of final accounts is the one
that is prepared towards the end of the accounting period i.e. on the last day of the
accounting period.

Transactions after the Trial Balance Date


There might be a number of accounting transactions which might not have been taken
into consideration by the time the Trial Balance has been prepared.
Some of the reasons for the presence of such transactions are
Transactions which do not occur in the normal course of business
There are a number of transactions relating to the business which do not occur in the
normal course of business. These transactions unless deliberately recorded do not get
into the books of accounts.
Examples for such transactions
i. Stock taken away by the proprietor for personal use
ii. Abnormal loss of stock
Transactions which have to be recorded only towards the end
There are a number of transactions relating to the business which have to be recorded
only at the end of the accounting period. If the trial balance has been prepared before
all such transactions into consideration have been taken into consideration, then they
stay unrecorded in the books of accounts.
i. Depreciation on Assets
ii. Expenses - Outstanding/Prepaid
iii. Incomes - Outstanding/Pre-received
Transactions relating to Error Rectifications
The agreement of a Trial Balance is not a conclusive proof of absence of errors in
accounting. Even in case where the trial balance agrees, there may still be errors
existing in the books of accounts.
These errors if identified subsequent to the preparation of the Trial Balance, need to be
rectified which needs journal entries to be passed for rectification.

What are Adjustments?


The transactions which have not yet been journalised, appended to
the trial balance are what we call adjustments.
Thus we can say that Adjustments are transactions relating to the
business which have not been journalised by the end of the
accounting period.
Illustration
Trial Balance of M/s Azaya Traders" as on 30th June
2006.
Particulars L/F
Debit
Amount
Credit
Amount
(in Rs) (in Rs)
Opening Stock
Purchases
Salaries
Wages
Carriage Inwards
Trading Charges
Carriage Outwards
Rent received
Cash
Capital
Bank (Overdraft)
Comission
Creditors
Sales
Debtors
Machinery
















86,000
11,36,000
1,53,000
18,000
26,900
64,000
52,500

62,500


42,780


2,56,000
4,80,000







1,78,300

3,44,700
37,980

2,68,000
15,48,700
Total 23,77,680 23,77,680
Adjustments
The following additional information is available
1. A Machine purchased on credit from M/s Ramsay Machine
Tools for Rs. 2,00,000 is not yet recorded in the books.
2. Wages to the extent of Rs. 43,000 are incorrectly recorded as
Salaries.
The additional information presented after the trial balance
contains information relating to accounting transactions, which are
to be identified from the wordings.

Why are they called Adjustments? Why not Additional Transactions?


Since adjustments are also transactions relating to the business, we need to bring
them into the accounting books by journalising them.
The trial balance is used for final accounting, so as to eliminate a lot of physical
work (in manual accounting) in the form of recording transactions for making up
final accounts, posting them into respective ledger accounts, balancing of ledger
accounts effected by these transactions.
Therefore even for the purpose of bringing the transactions represented by the
adjustments into books a method has been designed which would not require us to
record these transaction, post them and balance the ledger accounts affected. This
method incorporates the effect of the transactions into the final accounts without
having to go through the regular process of recording, posting, balancing etc.
Accounting for the Transactions
Recording the transactions represented by adjustments normally would result in
the existing balance in the affected ledger accounts to either increase or decrease.
Transaction
Wages to the extent of Rs. 43,000 are incorrectly recorded as Salaries.
This represents an error of principle whereby an expenditure that was to be debited
in a particular account has been debited to another account.
To bring the effect of this transaction into books, the journal entry to rectify this
error has to be recorded.
Journal/Ledger Hide/Show
The Method of Adjustment
This method involves identification of the effect and making mathematical
adjustments in the figures that we consider in final accounting (i.e. at the time of
showing them in the Trading a/c or Profit & Loss a/c or the Balance Sheet.).
Effect of the Transaction
The effect of the journal entry to be recorded in the above case can be analysed as
A. () From Salaries on the debit side of P/L a/c
The Salaries a/c which already has a debit balance is credited which will
result in a decrease in the existing debit balance.
To bring the effect of this transaction, the amount involved in the transaction
(Rs. 43,000) is deducted from the Salaries a/c balance (Rs. 1,53,000) shown
on the debit side of the "Profit & Loss a/c".
B. (+) To Wages on the debit side of Trading a/c
The Wages a/c which already has a debit balance is debited resulting in an
increase in the existing debit balance.
To bring the effect of this transaction, the amount involved in the transaction
(Rs. 43,000) is added to the Wages a/c balance (Rs. 18,000) shown on the
debit side of the "Trading a/c".
These are the adjustments to be made to bring the affect of the above transaction
into the books of accounts.
Why call them Adjustment? Why not Additional Transactions?
Since the affect of these transactions is incorporated by mathematical adjustments,
they are called Adjustments rather than just Additional Transactions.