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FINAL ACCOUNTS

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)

Prepaid expenses: Deduct from the respective expense in


the P & L A/c. and show as an asset in the balance sheet.

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)

Pre-received income (Unearned Revenue): (If


accounted for as revenue): Deduct from the revenue in the P & L A/c. and show as liability in the balance sheet

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)

Accrued Income: Credit the P & L A/c. with appropriate


income a/c. and show income accrued (but not received) as an asset in the balance sheet.

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)

Provision for Doubtful Debts: Debit the P & L A/c.


with the provision and show the provision as a deduction from Sundry Debtors in the balance Sheet.

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)

Provision for Discount on Debtors : This provision


is to be made with reference to the debtors after deducting the provision for doubtful debts.

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.

Provision for Discount on Debtors (Contd.)


Illustration:
Sundry Debtors as per the trial balance Rs. 5,00,000. Provide 5% for doubtful debts and 1 % for discount on debtors.

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)

Loss by Fire::Loss of stock by fire is credited to the


trading account.
If the stock is fully insured and the full claim is admitted by insurance co. but not received till the date of the balance sheet, it is shown as an asset in the balance sheet. In case claim is for a part of the value of the stock destroyed, in addition to the above disclosures, the irrecoverable portion is written off as loss by fire by debiting the profit and loss account.

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)

Goods Distributed as free samples: Contd. Trading & P & L A/c.


Expenses
To Purchases Less: Goods distributed as free samples To Advertisement Exps. (Goods distributed as free samples)

Income

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