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ADJUSTMENTS
A. The basics: Opening Stock in the trial balance is debited to the trading account. Closing Stock (generally given as additional information) is credited to the trading a/c. and shown as an asset in the balance sheet.
Purchases / Sales returns are deducted From purchases / sales figures in the trading a/c.
All expenses incurred for the manufacturing / trading activity are debited to the manufacturing / trading a/c. e.g. wages (of workmen), fuel and power, lighting, rent, rates and taxes, etc. of factory or shop. Expenses to bring purchased goods to the factory or shop are debited to the trading a/c. (e.g. carriage inward / freight).
The adjustments:
(Assumed accounting year: April to March)
Illustration:
Prepaid Insurance: Insurance premium paid for the year July to June-Rs. 12,000 debited to Insurance account
P & L A/c.
Expenses
To Insurance Less: Prepaid 12,000 3,000 9000
Balance Sheet
Liabilities Assets
Prepaid Insurance 3,000
Income
The adjustments:
(Assumed accounting year: April to March)
Outstanding expenses:
Illustration:
Add to the respective expense in the P & L A/c. and show as a liability in the balance sheet .
Outstanding salary: Salary as per trial balance Rs.5,50,000. March salary payable in April, yet to be accounted for Rs. 50,000.
P & L A/c.
Expenses
To Salary Add: Outstanding 5,50,000 50,000 6,00,000
Balance Sheet
Liabilities
Outstanding Salary 50,000
Income
Assets
The adjustments:
(Assumed accounting year: April to March)
Illustration:
Advance from customers: Annual revenue Rs. 51,00,000, including Rs. 1,00,000 Advance received from customers accounted for as revenue.
Trading A/c.
Expenses Income
Sales Less: Adv. From Customers 51,00,000
Balance Sheet
Liabilities
Advance From Customers
Assets
1,00,000 50,00,000
1,00,000
The adjustments:
(Assumed accounting year: April to March)
Illustration:
Deposit of Rs. 10,000 kept with bank on July 1, @ 12% p. a. for 5 years.
P & L A/c.
Expenses Income
By Interest Accrued 900
Balance Sheet
Liabilities Assets
Interest Accrued On Bank Deposit
900
The adjustments:
(Assumed accounting year: April to March)
Illustration:
Sundry Debtors as per the trial balance Rs. 5,00,000. Create a provision of 5 % for doubtful debts.
P & L A/c.
Expenses
To Provision for Doubtful Debts 25000
Balance Sheet
Liabilities Assets
Sundry Debtors 5,00,000 Less: Provision For Doubtful Debts 25,000 4,75,000
Income
The adjustments:
(Assumed accounting year: April to March)
This is because doubtful debtors cannot be expected to become entitled to any cash discount for prompt payment.
Debit the P & L A/c. with the provision and show the provision as a deduction from Sundry Debtors in the balance Sheet , after the deduction of the provision for doubtful debts.
P & L A/c.
Expenses
To Provision for Doubtful Debts 25000 To Provision for Discount On Debtors
Balance Sheet
Income Liabilities Assets
Sundry Debtors 5,00,000 Less: Provision For Doubtful Debts 25,000 4,75,000 Less: Provision For Discount On Debtors 4750 4,70,250
4,750
The adjustments:
(Assumed accounting year: April to March)
The adjustments:
(Assumed accounting year: April to March)
Depreciation: It means diminution in the utility value of assets due to wear and tear or passage of time. Illustration:
Provide depreciation @ 15% on Plant and machinery of Rs. 10,00,000.
P & L A/c.
Expenses To Depreciation 1,50,000 Income Liabilities
Balance Sheet
Assets Plant & Machinery 10,00,000 Less: Depreciation 1,50,000 8,50,000
The adjustments:
(Assumed accounting year: April to March)
Goods Distributed as free samples: Sometimes goods are distributed as free samples. This will have to be accounted for in two places. 1.Since the goods are generally distributed as free samples for sales promotion, the amount of such goods will be debited to the P & L A/c. as Advertisement Expenses A/c.
2. The amount of such goods will also have to be deducted from Purchases to complete the double entry in the trading account.
The adjustments:
(Assumed accounting year: April to March)
Income