1

FINAL
ACCOUNT
WITH
ADJUSTMENTS
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Table of Contents

Outstanding expense………………
Prepaid expenses……………………
Accrued income…………..
Unearned income…….
Depreciation ………………..
Closing stock……
Bad debts provision for bad debts…….
Provision for discount on debtors
Interest on capital
Interest on drawing
Practical Problems
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Define the term “Financial Statements”

Statements prepared in business to show financial performance and financial health of the

FINAL ACCOUNT
WITH
ADJUSTMENTS
business.
2- What is meant by direct expenses?
All those expenses which are incurred to purchase of goods or those expenses which are
incurred to convert raw material into finished goods are called direct expenses.
3- List down the direct expenses:
 Wages and salaries
 Purchases carriage inward
 Freight inward
 Octari duty
 Royalty manufacturing expenses
 Cartage inward
4- Define direct income?
Revenue earned through sales of goods in ordinary course of the business is called direct
income.
8- Define Gross Profit?
Gross profit means excess of direct incomes over direct expenses.
9- What is the closing entry is done of closing stock?
Closing Stock Account (Dr)
Income Summary Account (Cr)
10- What is the closing entry of transferring gross profit/loss to profit and loss account?
 4

In case of Gross profit :

Income Summary Account (Dr)
Profit & Loss Account (Cr)
In case of Gross Loss:
Profit & Loss Account (Dr)
Income Summary Account (Cr)
11- What is meant by indirect expenses?
All expenses which are incurred in operation of business except direct expenses are known
as indirect expense.

12- List down the indirect expenses?

 Salaries
 Rent
 Interest paid
 Discount allowed
 Trade expense
 Advertising
 Commission
 Bad debt
 Depreciation of Asset
 Carriage out
 Freight out
 Interest on capital
 Repair and Renewals
 Printing & Stationery
 Legal charges
13- Define indirect income?
Indirect incomes are those types of incomes which are earned other than routine earring of
the business.
 Interest received
 Commission received
 Discount received
 Interest on drawings
 Dividend received
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14- What is the closing entry of Net profit/ Loss?

In case of Net Profit:
Profit & Loss Account (Dr)
Capital Account (Cr)
In case of Net Loss:
Capital Account (Dr)
Profit & Loss Account Cr)

18- Define Balance Sheet?

Balance sheet shows the financial status of the business or it shows the total assets and
liabilities on a specific period of time.
19- Define Fixed Assets?
Assets which have long life and which are bought for use in business for long period or time
are called Fixed assets e.g. Land, plant , furniture & equipment etc.
20- Define Real Assets?
Real assets mean the assets which have some market value for example furniture, motor
vehicle, cash, patent rights, goodwill etc.
21- How many types of real assets?
Real assets can be divided into two major kinds:
(I) Fixed Assets (ii) Current Assets
22- Define Tangible Assets?
Tangible assets mean those assets which have physical existence and can be touched, felt
and seen. For instance: plant, machinery, motor car, etc.
23- Define Intangible Assets?
Intangible assets mean which can not be seen, touched or felt and having no physical
existence. For example: Trade mark, patent right, goodwill etc
24- Define Current Assets?
Current assets mean those assets which can be converted into cash in short time or are
held for sale and having short term life. For example: Cash, Bank, Stock, Debtors, and Bills
Receivable etc.
25- Define Fictitious Assets?
Fictitious assets have no market value. These assets cannot be converted into cash. For
example: Preliminary expenses.
26-Define Wasting Assets?
Wasting assets are those whose value gradually reduces with usage till the end of assets.
27- Define Current Liabilities?
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The liabilities which are payable in near future or payable immediately within a year are
called current liabilities or short term liabilities. For example: outstanding expenses, bank
overdraft and Creditors, bills payable etc.

29- Define Fixed Liabilities?

The liabilities which are payable not in a near future or not payable immediately in a year
called fixed liabilities. For example: Debentures, long tern loan etc.
30- Define Internal Liabilities?
The total amount of debts payable by a business to its owner is called internal liabilities
e.g. Capital.
31- Define External Liabilities?
The total amount of debts payable by business to the outsiders (other than the owners) is
called external liabilities. E.g. Creditors, Bills payable etc.

ADJUSTMENTS:
The transactions which remain unrecorded or recorded wrongly during the accounting
period and are adjusted at the end of accounting period are known as adjustments.

1- Define “ADJUSTING ENTRY”.

An adjusting entry is made at the end of accounting period to correct or update the
information.
2- Define “Cash system of accounting”.
It is a system of recording cash transactions when cash is received or paid whether it
relates with current accounting year or not for the ascertainment of profit and loss.
Or
It is system in which accounting entries are made only when cash is received or paid.

3- Define “Accrual or Mercantile system of accounting”

Accrual or Mercantile system of accounting is, in which all revenues are compared with all
expenses relating to current year whether received or paid in cash or not for the
ascertainment of profit or loss.”
Or
It is a system in which accounting entries are made on the basis of amount having become
due for payment or receipt.

4- Define the term “Outstanding expenses”

Accrued expenses are these which had been incurred during the current year but have not
been paid till the end of the year.
5- Define the term “Prepaid Expenses”
Prepaid expenses mean those expenses which have been paid in advance but the benefit of
these expenses has not been received till the end of the year.
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6- Define the term “Accrued Income”.

Accrued income means income receivable, accrued income is an income which has been
earned during the current accounting period but has not been received.
7- Define the term “Unearned Income”
Unearned income means income which have not been earned during the current accounting
period but received in advance.
8- Define the term “Provision for Bad Debts”
The provision, which is maintained for doubtful debts in future is known as provision for
doubtful or Bad Debts.

9- Define the term “Bad Debts Recovered”

The debts which are written off as bad, if recovered in future are called bad debts.

10- Define the term “Doubtful Debts”

The debts, the recovery of which is doubtful or uncertain are called as doubtful debts.

11- Define the term “Accumulated Depreciation”

The total of the depreciation expense in the different accounting years is called
accumulated depreciation.
12- Define the term “Interest on Capital”
It is an amount charged by the owner on the amount invested by him in business as a
capital.
13- Define the term “Interest on Drawings”
Interest on drawing is an amount charged by the business on withdraws of cash or goods for
personal use by owner.
14- Define the term “Provision for discount on debtors”
Provision which is created for those debtors, who pay their debts within the discount
period, is known as provision for discount on debtors.
15- Define the term “Provision for discount on creditors”
Provision which is created at the year end for the estimated amount of discount receivable
from creditors is known as provision for discount on creditors.
16- Define the term “Operating expenses”
Operating expenses are those expenses which are incurred by the business to generate
profit during the current accounting year; these include selling and administrative
expenses.
17- Define the term “Selling expenses”
All those expenses which are incurred to sell goods during the year are called Selling
expenses.
18- Define the term “Administrative Expenses”
All expenses which are incurred during the year in connection with office administration
are called administrative expenses.
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ADJUSTMENTS [TREATEMENTS]
1- OUTSTANDING EXPENSES:
Definition:-
Accrued expenses are these which had been incurred during the current year but have not
been paid till the end of the year.
Nature: -
Current Liability
Different Names: -
Expenses due but not yet paid
Accrued Expenses
Expenses still due or payable
Adjusting entry: -
DATE PARTICUALRS L/F DEBIT CREDIT
(Rs.) (Rs.)
Related Expense A/C xxx
Outstanding Expense A/C xxx
(Expenses due but not yet paid)
Treatment:-
IF GIVEN IN ADJUSTMENT:-
IN INCOME STATEMENT:
ADD in related expense
IN BALANCE SHEET:
Show among current liabilities as per nature.
Practical example:
Trial Balance
S/NO. ACCOUNTS HEAD A/C DEBIT CREDIT
NO. (Rs.) (Rs.)
Wages 40,000
Salaries 50,000
Adjustment:
1. Wages still payable are Rs. 5,000.
2. Salaries outstanding are Rs. 10,000.
Adjusting entries: -
DATE PARTICUALRS L/F DEBIT CREDIT
(Rs.) (Rs.)
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Wages A/C 5,000

Outstanding Wages A/C 5,000
(Wages due but not yet paid)
Salaries A/C 10,000
Outstanding Salaries A/C 10,000
(Salaries due but not yet paid)

Effect in Income Statement Account:

PATICULAR AMOUNT AMOUNT
(Rs.) (Rs.)
Wages 40,000
Add Outstanding 5,000 45,000

Salaries 50,000 60,000

Add Outstanding 10,000
Effect in Balance Sheet:
LIABILITIES AMOUNT AMOUNT
(Rs.) (Rs.)
CURRENT LIABILITES:
OUTSTANDING EXPENSES:
Wages 5,000
Salaries 10,000 15,000
TREATMENT IF GIVEN IN TRIAL BALANCE:
There will be only single treatment as per nature:
Balance Sheet: - Current Liabilities

2- PREPAID EXPENSES:
Definition:-
Prepaid expenses mean those expenses which have been paid in advance but the benefit of
these expenses has not been received till the end of the year.
Nature: -
Current Assets
Different Names: -
Expenses paid in advance
Unexpired expenses
Expenses related to next accounting period
Adjusting entry: -
DATE PARTICUALRS L/F DEBIT CREDIT
(Rs.) (Rs.)
Prepaid Expense A/C xxx
Related Expense A/C xxx
(Expenses paid in advance.)
TREATMENT:
IF GIVEN IN ADJUSTMENT:-
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IN INCOME SUMMARY:
Less from related expense
In Balance Sheet:
Show among current assets as per nature.

Practical example:
Trial Balance (31-12-2008)
S/NO. ACCOUNTS HEAD A/C DEBIT CREDIT
NO. (Rs.) (Rs.)
Insurance 15,000
Rent 25,000
Adjustment:
1. Insurance paid up to 31st March next year.
2. Rent prepaid was Rs. 5,000.
Adjusting entries: -
DATE PARTICUALRS L/F DEBIT CREDIT
(Rs.) (Rs.)
Prepaid Insurance A/C 3,000
Insurance A/C 3,000
(Paid Insurance in advance.)
Prepaid Rent A/C 5,000
Rent A/C 5,000
(Rent paid in advance.)
Effect in Income Statement:

PATICULAR AMOUNT AMOUNT

Insurance 15,000
Less Prepaid (3,000) 12,000
Rent 25,000
Less Prepaid (5,000) 20,000

Effect in Balance Sheet:

ASSETS AMOUNT
(Rs.)
CURRENT ASSETS:
Prepaid Expenses:
Insurance 3,000
Rent 5,000 8,000

TREATMENT IF GIVEN IN TRIAL BALANCE:

There will be only single treatment as per nature:
Balance Sheet: - Current Assets

3- ACCRUED INCOME:
Definition:-
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Accrued income means income receivable, accrued income is an income which has been
earned during the current accounting period but has not been received.
Nature: -
Current Assets

Different Names: -
Income due but not yet received
Outstanding income
Income still receivable
Adjusting entry: -
DATE PARTICUALRS L/F DEBIT CREDIT
(Rs.) (Rs.)
Accrued Income A/C xxx
Related Income A/C xxx
(Income due but not yet received.)
TREATMENT:
IF GIVEN IN ADJUSTMENT:-
IN INCOME STATEMENT:
Add in related Income
IN BALANCE SHEET:
Show among current assets as per nature.
Practical example:
Trial Balance (31-12-2008)
S/NO. ACCOUNTS HEAD A/C DEBIT CREDIT
NO. (Rs.) (Rs.)
Interest received 1,500
Commission Received 4,500
Adjustment:
1. Interest accrued Rs. 500.
2. Commission receivable Rs. 1,500.
Adjusting entries: -
DATE PARTICUALRS L/F DEBIT CREDIT
(Rs.) (Rs.)
Accrued Interest A/C 500
Interest A/C 500
(Paid Insurance in advance.)
Accrued Commission A/C 1,500
Commission A/C 1,500
(Paid Insurance in advance.)

Effect in Income Statement:

PATICULAR AMOUNT
(Rs.)
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Interest 1,500
Add Accrued 500 2,000
Commission 4,500
Add Accrued 1,500 6,000

Effect in Balance Sheet:

ASSETS AMOUNT
(Rs.)
CURRENT ASSETS:
Accrued Income:
Interest 500
Commission 1,500 2,000

TREATMENT IF GIVEN IN TRIAL BALANCE:

There will be only single treatment as per nature:
Balance Sheet: - Current Assets

4- UNEARNED INCOME:
Definition:-
Unearned income means income which have not been earned during the current accounting
period but received in advance.
Nature: -
Current Liabilities
Different Names: -
Income received in advance
Pre-received income
Income received but not yet due
Adjusting entry: -
DATE PARTICUALRS L/F DEBIT CREDIT
(Rs.) (Rs.)
Income A/C xxx
Unearned Income A/C xxx
(Income received in advance.)
TREATMENT:
IF GIVEN IN ADJUSTMENT:-
IN INCOME STATEMENT:
Less from related Income
IN BALANCE SHEET:
Show among current Liabilities as per nature.
Practical example:
Trial Balance (31-12-2008)
S/NO. ACCOUNTS HEAD A/C DEBIT CREDIT
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NO. (Rs.) (Rs.)

Interest received 3,500
Commission Received 7,500

Adjustment:
1. Interest Unearned Rs. 1,500.
2. Commission received in advance Rs. 2,500.
Adjusting entries: -
DATE PARTICUALRS L/F DEBIT CREDIT
(Rs.) (Rs.)
Interest A/C 1,500
Unearned Interest A/C 1,500
(Interest received in advance.) 2,500
Commission A/C 2,500
Unearned Commission
A/C
(Commission received in advance.)
Effect in Income Statement :
PATICULAR AMOUNT
Interest 3,500
Less Unearned (1,500) 2,000
Commission 7,500
Less Unearned (2,500) 5,000

Effect in Balance Sheet:

LIABILITIES AMOUNT
(Rs.)
CURRENT LIABILITIES:
UNEARNED INCOME:
Interest 1,500
Commission 2,500 4,000

TREATMENT IF GIVEN IN TRIAL BALANCE:

There will be only single treatment as per nature:
Balance Sheet: - Current Liabilities

5- DEPRECIATION:
Definition:-
Depreciation means annual decrease in fixed asset due to use of the asset. It is essential in
accounting create appropriate provision against assets.
Nature: -
Expenses

Adjusting entry: -
DATE PARTICUALRS L/F DEBIT CREDIT
(Rs.) (Rs.)
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Depreciation A/C
Related Asset A/C xxx
(Charged depreciation on asset.) xxx
TREATMENT:
IF GIVEN IN ADJUSTMENT:-
IN INCOME STATEMENT:
Show among the operative expenses
IN BALANCE SHEET:
Less: from related Assets.
Working Notes:
In case of straight Line Method
Annual Depreciation: - Cost of Asset x Depreciation Percentage x Duration of use
Practical example:
Trial Balance (31-12-2008)
S/NO. ACCOUNTS HEAD A/C DEBIT CREDIT
NO. (Rs.) (Rs.)
Machinery 25,000
Furniture 15,000

Adjustment:
1. Charge depreciation on Machinery @ 10%.
2. Charge depreciation on Furniture @ 20%.
Adjusting entries: -
DATE PARTICUALRS L/F DEBIT CREDIT
(Rs.) (Rs.)
Depreciation A/C 2,500
Machinery A/C 2,500
(Charged depreciation on Machinery.)
Depreciation A/C 3,000
Furniture A/C 3,000
(Charged depreciation on Furniture.)

Effect in Income Statement Account:

PATICULAR AMOUNT
(Rs.)
Depreciation on:
Machinery 2,500
Land 3,000
Effect in Balance Sheet:
ASSETS AMOUNT
(Rs.)
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Machinery 25,000
Less Depreciation (2,500) 22,500

Land 15,000 12,000

Less Depreciation (3,000)
TREATMENT IF GIVEN IN TRIAL BALANCE:
There will be only single treatment as per nature:
Profit & Loss: - Debit side

Working Notes:
Annual Depreciation: - Cost of Asset x Depreciation Percentage x Duration of use

10 12
Machinery = 25,000 x 100 x 12 = 2,500
20 06
Furniture = 15,000 x 100 x 12 = 1,500

6- CLOSING STOCK:
Definition:-
Unsold goods at the end of accounting period are known as stock.
Nature: -
Current Asset
Different Names: -
Merchandise Inventory at the end of year
Closing stock/Inventory
Adjusting entry: -
DATE PARTICUALRS L/F DEBIT CREDIT
(Rs.) (Rs.)
Closing Stock A/C xxx
Income Summary /Trading xxx
A/C
(Closing stock recorded.)
TREATMENT:
IF GIVEN IN ADJUSTMENT:-
IN INCOME STATEMENT:
Show in Cost of Goods of Sold
IN BALANCE SHEET:
Show among Current Assets
Practical example:
Trial Balance (31-12-2008)
S/NO. ACCOUNTS HEAD A/C DEBIT CREDIT
NO. (Rs.) (Rs.)
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Adjustment:
1. Closing Stock. Rs. 25,000
Adjusting entries: -
DATE PARTICUALRS L/F DEBIT CREDIT
(Rs.) (Rs.)
Closing Stock A/C 25,000
Trading A/C 25,000
(Closing stock recorded.)
Effect in Income Statement Account:
PATICULAR AMOUNT
(Rs.)
Closing Stock
25,000
25,000

Effect in Balance Sheet:

ASSETS AMOUNT
(Rs.)
ASSETS:
CURRENT ASSETS:
Closing Stock 25,000

TREATMENT IF GIVEN IN TRIAL BALANCE:

There will be only single treatment as per nature:
Balance Sheet: - Current Assets
7- DEBTS, DOUBTFUL DEBTS, BAD DEBTS & PROVISION FOR BAD DEBTS
DEBTS:
Debts are of three types:
 Good Debts
 Doubtful debts
 Bad Debts
Good Debts:
These are debts which are paid within credit period or discount period.
Doubtful Debts
The debts payment of which is doubtful are known as doubtful debts.
BAD DEBTS
Bad debts mean the amount which is irrecoverable from debtors and proved bad.
Nature:
Loss
Different Names:
Uncollectible
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Irrecoverable

Adjusting Entry:
When no provision is maintained:
DATE PARTICUALRS L/F DEBIT CREDIT
(Rs.) (Rs.)
a) When debtor’s account declared bad: xxxx
Bad Debts A/C xxxx
b) Debtor’s Personal A/C
(Debtor’s a/c closed as bad.)
When Bad Debts account is closed
Profit & Loss/Income Summary A/C
Bad Debts A/C xxxx
(Bad debts a/c closed.) xxxx

When Provision for bad / doubtful debts is maintained:

DATE PARTICUALRS L/F DEBIT CREDIT
(Rs.) (Rs.)
a) When debtor’s account declared bad: xxxx
Bad Debts A/C xxxx
Debtor’s Personal A/C
(Debtor’s a/c closed as bad.)
When Bad Debts account is closed
b) Provision for Bad Debts A/C
Bad Debts A/C xxxx
(Bad debts a/c closed.) xxxx

Provision for Bad Debts

The provision, which is maintained for doubtful debts in future is known as provision for
doubtful or Bad Debts.
Nature:
Current Liability
Different Names:
Bad Debts Reserve
Reserve/Provision for Bad Debts (Uncollectible/Irrecoverable)
Reserve/Provision for Doubtful Debts
Adjusting Entry:
DATE PARTICUALRS L/F DEBIT CREDIT
(Rs.) (Rs.)
When provision is maintained
xxx
Profit & Loss/Income Summary A/C
xxx
Provision for Bad Debts A/C
(Provision is maintained.)
When provision extra provision is
closed to profit & Loss A/C xxx
Provision for Bad Debts A/C
Profit & Loss/Income Summary xxx
A/C
(Provision is written back.)

Practical example:
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Example No: 1 [WHEN OLD PROVISION IS NOT THAT ENOUGH FOR

BAD DEBTS AND NEW PROVISION FOR NEXT YEAR]

Trial Balance (31-12-2009)

S/NO. ACCOUNTS HEAD A/C DEBIT CRED
NO. (Rs.) IT
(Rs.)
Sundry Debtors 105,000
Old Bad Debts
Bad Debts 15,000
Old Provision Provision for Bad Debts 18,00
0

Adjustment:
New Bad Debts
1. Further Bad Debts were Rs. 5,000.
New Provision 2. Maintain provision for bad debts @ 10%.

Effect in Income Summary:

PATICULAR AMOUNT
(Rs.)
Provision for Bad Debts 12,000
A/C 20,000

Effect in Balance Sheet:

ASSETS AMOUNT
(Rs.)

CURRENT ASSETS:
Sundry Debtors 105,000
Less Bad Debts (5,000)
100,000
90,000
Less New Reserve (10,000)

Working Notes:

Calculation of New Reserve to be maintained for next year:

(Amount of Debtors – New Bad Debts) x Provision Percentage
(105,000 – 5,000) x 10/100 = 100,000 x 10/100 = 10,000

Calculation of New Reserve to be shown in profit & Loss A/C:

N- New Reserve 10,000
+ B- Bad Debts (15,000 + 5,000) 20,000
30,000
- O- Old Reserve (18,000)
12,000
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Note: In the above case the answer of (N+B-O) is a positive number so that means
that old provision is not enough to meet bad debts expense and new provision to be
made for next year so remaining amount was withdrawn out of Profit and Loss
Account(Dr-Side).

Example No: 2 [WHEN OLD PROVISION IS ENOUGH FOR

BAD DEBTS AND NEW PROVISION FOR NEXT YEAR]

Trial Balance (31-12-2009)

S/NO. ACCOUNTS HEAD A/C DEBIT CRED
NO. (Rs.) IT
(Rs.)
Sundry Debtors 105,000
Old Bad Debts
Bad Debts 15,000
Old Provision Provision for Bad Debts 35,00
0

Adjustment:
New Bad Debts
1. Further Bad Debts were Rs. 5,000.
New Provision 2. Maintain provision for bad debts @ 10%.

Effect in Income Summary:

PATICULAR AMOUNT
(Rs.)
Provision for Bad Debts A/C 5,000
5,000

Effect in Balance Sheet:

ASSETS AMOUNT
(Rs.)

CURRENT ASSETS:
Sundry Debtors 105,000
Less Bad Debts (5,000)
100,000
Less New Reserve (10,000)
90,000
Working Notes:
Calculation of New Reserve to be maintained for next year:
(Amount of Debtors – New Bad Debts) x Provision Percentage
(105,000 – 5,000) x 10/100 = 100,000 x 10/100 = 10,000
Calculation of New Reserve to be shown in profit & Loss A/C or Income
Statement:
N- New Reserve 10,000
+ B- Bad Debts (15,000 + 5,000) 20,000
30,000
- O- Old Reserve (35,000)
(5,000)
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Note: In the above case the answer of (N+B-O) is a negative number so that means
that old provision is enough to meet bad debts expense and new provision to be
made for next year so excess amount was written back to Profit and Loss Account
(Cr-Side).
8- PROVISON FOR DISCOUNT ON DEBTORS:
Definition:-
Provision which is created for those debtors, who pay their debts within the discount
period, is known as provision for discount on debtors.
Nature: -
Current Liability
Different Names: -
Reserve for discount on debtors
Reserve for discount on Accounts Receivable
Reserve for discount on Book Debts
Adjusting entry: -
DATE PARTICUALRS L/F DEBIT CREDIT
(Rs.) (Rs.)
Profit & Loss A/C xxx
Provision for Discount on Debtors A/C xxx
(Provision for discount on debtor was charged.)
TREATMENT:
IF GIVEN IN ADJUSTMENT:-
IN INCOME SUMMARY ACCOUNT:
Dr-Side
In Balance Sheet:
Less from Debtor

Example # 1: When no provision for bad debts is maintained and Bad Debts A/C Closed
to profit & Loss A/C.
Trial Balance (31-12-2009)
S/NO. ACCOUNTS HEAD A/C DEBIT CREDIT
NO. (Rs.) (Rs.)
Sundry Debtors 105,000
Bad Debts 15,000

Adjustment:
1. Further Bad Debts were Rs. 5,000.

Adjusting Entries:
DATE PARTICUALRS L/F DEBIT CREDIT
(Rs.) (Rs.)
When debtor’s account declared bad:
Bad Debts A/C 5,000
Sundry Debtors A/C 5,000
(Debtor’s a/c closed as bad.)
When Bad Debts account is closed
Profit & Loss A/C 20,000
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Bad Debts A/C 20,000

(Bad debts a/c closed.)

Position of Accounts after adjusting entries:

Dr. Bad Debts Account Cr.
DATE PARTICULARS J/F AMOUNT DATE PARTICULARS J/F AMOUNT
Rs. Rs.
2009 Balance b/d 15,000 2009 Profit & Loss A/C 20,000
Dec-31 Dec-31
Sundry Debtors 5,000
20,000 20,000
Dr. Sundry Debtors Account Cr.
DATE PARTICULARS J/F AMOUNT DATE PARTICULARS J/F AMOUNT
Rs. Rs.
2009 Balance b/d 105,000 2009 Bad Debts A/C 5,000
Dec-31 Dec-31
Balance c/d 100,000
105,000 105,000

Effect in Income Statement Account:

PATICULAR AMOUNT PATICULAR AMOUNT
(Rs.) (Rs.)
Bad Debts A/C 20,000
20,000 20,000
Effect in Balance Sheet:
ASSETS AMOUNT
(Rs.)

CURRENT ASSETS:
Sundry Debtors 105,000 100,000
Less Bad Debts (5,000)

Example # 2: When New provision for bad debts is maintained and Bad Debts A/C Closed
to Provision for Bad Debts A/C.
Trial Balance (31-12-2009)
S/NO. ACCOUNTS HEAD A/C DEBIT CREDIT
NO. (Rs.) (Rs.)
Sundry Debtors 105,000
Bad Debts 15,000

Adjustment:
1. Further Bad Debts were Rs. 5,000.
2. Maintain provision for bad debts @ 10%.

Adjusting Entries:
DATE PARTICUALRS L/F DEBIT CREDIT
(Rs.) (Rs.)
 22

When debtor’s account declared bad:

Bad Debts A/C 5,000
Sundry Debtors A/C 5,000
(Debtor’s a/c closed as bad.)
When Provision for Bad Debts is maintained:
Profit & Loss A/C 30,000
Provision for Bad Debts A/C 30,000
(Provision is maintained out of profit.)
When Bad Debts Account is closed: 20,000
Bad Debts A/C 20,000
Sundry Debtors A/C
(Debtor’s a/c closed as bad.)

Position of Accounts after adjusting entries:

Dr. Bad Debts Account Cr.
DATE PARTICULARS J/F AMOUNT DATE PARTICULARS J/F AMOUNT
Rs. Rs.
2009 Balance b/d 15,000 2009 Profit & Loss A/C 20,000
Dec-31 Dec-31
Sundry Debtors 5,000
20,000 20,000
Dr. Sundry Debtors Account Cr.
DATE PARTICULARS J/F AMOUNT DATE PARTICULARS J/F AMOUNT
Rs. Rs.
2009 Balance b/d 105,000 2009 Bad Debts A/C 5,000
Dec-31 Dec-31
Balance c/d 100,000
105,000 105,000

Effect in Income Statement Account:

PATICULAR AMOUNT PATICULAR AMOUNT
(Rs.) (Rs.)
Bad Debts A/C 20,000
20,000 20,000

Effect in Balance Sheet:

LIABILITIES AMOUNT ASSETS AMOUNT
(Rs.) (Rs.)

CURRENT ASSETS:
Sundry Debtors 105,000 100,000
Less Bad Debts
(5,000)

Working Notes:

Calculation of New Reserve to be maintained for next year:

(Amount of Debtors – New Bad Debts) x Provision Percentage
(105,000 – 5,000) x 10/100 = 100,000 x 10/100 = 10,000
 23

Calculation of New Reserve to be shown in profit & Loss A/C:

N- New Reserve 10,000
+ B- Bad Debts (15,000 + 5,000) 20,000

- O- Old Reserve Nil_

30,000

PROBLEMS
1- From the following Trial Balance, prepare a Income Statement for the year
ended 31.12.2005.

PARTICULARS Dr.Rs. Cr.Rs.

Capital 320000
Drawings 90000
Building 300000
Machinery 800000
Bills Receivable 6000
Bills Payable 67600
Accounts Receivable 90000
Accounts Payable 140000
Returns inward 4000
Returns outward 5300
Carriage inward 2000
Carriage outward 1000
Furniture 8400
Wages 51600
Salaried 70000
Stock on 1.1.2005 80000
Purchases 102000
Sales 436000
Bad debts 2400
Rent 12200
Cash in hand 50800
General expenses 18500
968900 968900

Closing Stock was valued a Rs. 70,000.

2-The following Trial Balance is taken out from the books of Rashid & Sons as on
31st December, 2010.

PARTICULARS Dr.Rs. Cr.Rs.

Plant & Machinery 100000
Opening Stock 60000
 24

Purchases 160000
Building 170000
Freight inward 3400
Carriage outward 5000
Wages 32000
Accounts Receivable 100000
Salaries 24000
Furniture 36000
Commission 12000
Discount on sales 1900
Advertisement 5000
Bad debts 1800
Drawings 10000
Bills Receivable 50000
Insurance 4400
Bank Balances 20000
Sales 480000
Interest received 2000
Sundry Creditors 40000
Bank loan 100000
Discount on Purchases 2000
Capital 171500
795500 795500

Requirement:
Prepare Income Statement of the business for the year ended 31.12.2010 and a Balance
Sheet as at that date: Closing stock is valued at Rs. 90000.
3-The following Trial Balance is taken out from the books of Rashid & Sons as on
31st December, 2010.
PARTICULARS Dr.Rs. Cr.Rs.
Plant & Machinery 200000
Opening Stock 120000
Purchases 380000
Building 340000
Freight inward 6800
Carriage outward 10000
Wages 64000
Accounts Receivable 200000
Salaries 48000
Furniture 72000
Interest 24000
Discount on sales 3800
Advertisement 10000
Bad debts 3600
Drawings 20000
Bills Receivable 100000
Insurance 8800
 25

Bank Balances 40000

Sales 960000
Interest received 4000
Sundry Creditors 80000
Bank loan 200000
Discount on Purchases 4000
Capital 343000
1591000 1591000
Requirement:

Prepare Income Statement of the business for the year ended 31.12.2010 and a Balance
Sheet as at that date: Closing stock is valued at Rs. 180000.

4-The following Trial Balance was extracted from the books of Naeem & Sons on
31st March, 2005. From this you are required to prepare an income statement
for the year ended on 31.3-2005 and a Balance Sheet as at that date:
Trial Balance on 31.3-2005
Debit Credit
Cash 5,000
Accounts Receivable 9,000
Merchandise Inventory on 1.4-2004 6,000
Plant & Machinery 24,000
Land & Building 82,000
Furniture & Fixture 2,600
Capital 136,000
Accounts Payable 3,800
Purchases 60,000
Purchases Returns 2,200
Discount on purchases 600
Sales 70,000
Sales Return 3,000
Sales Discount 1,600
Insurance prepaid 3,400
Advertisement expenses 4,000
Salaries 12,000
212,600 212,600

Adjustments:

1- Prepaid insurance on 31.3.2005 is Rs. 1400

2- Outstanding salaries Rs. 1000
3- Depreciation on plant and machinery @ 10% p.a
4- Merchandise inventory on 31.3.2005 was valued at Rs. 6000
5-The following Trial Balance was extracted form the books of AB & Co. on
31.12.2005:
Rs. Rs.
Purchases 10,944 Capital 11,380
 26

Sales Return 120 Mortgage Loan 4,000

Opening Stock 4,396 Accounts Payable 1,300
Discount on Sales 260 Sales 25,360
Office equipment 14,000 Purchases Returns 130
Accounts Receivable 4,500 Interest 1,520
Cash in hand 415 Dividend Received 300
Salaries 1,305
Rent 1,200
Furniture 2,000
Advertisement 2,150
Insurance 900
Wages 950
Bad debts 250
Commission 600
43,990 43,990

Adjustments:
1- Rent paid in advance Rs. 350
2- Accrued Interest Rs. 120
3- Outstanding Salaries Rs. 295
4- Depreciation Equipment at 10% & Furniture at 20%
5- Closing Inventory was valued at Rs. 7500.

Required:
Draw up an Income Statement and a Balance Sheet as on 31.12-2005.

6-The following are the balances extracted from the books of Saeed Traders as
at 31st December, 2011.
Rs. Rs.
Inventory (1.1.2011) 45,270 Capital 555,400
Drawings 4,550 Accounts Payable 45,750
Buildings 400,000 Commission received 4,125
Office Equipment 100,000 Rent received 21,125
Cash in hand 29,150 Discount 2,850
Cash at bank 116,540 Sales 392,470
Accounts Receivable 69,750 Purchases return 12,280
Prepaid advertisement 10,150 9 % bank loan 42,000
Purchases 232,710
Sales Returns 5,540
Carriage in 7,825
Salaries 37,875
Travelers commission 3,940
Office Expenses 4,500
Discount 2,150
Insurance 4,270
Interest on loan 1,780
1076,000 1076,000
Adjustments:
1- Merchandise inventory at 31.12.2011 was valued at Rs. 25470.
2- Prepaid advertisement Rs. 3520; insurance unexpired Rs. 2140.
3- Interest on bank loan is outstanding.
 27

4- Allow interest on capital at 5% p.a.

5- Depreciate building at 5% and equipment at 10%.
Requirement:

Prepare Income Statement & Balance Sheet

7-From the following Trial Balance of Saeed & Co. you are required to prepare
Income Statement for the year ending 31st December, 2005 and a balance sheet
as that date

Debits Credit
Land & building 255,000
Plant & machinery 120,000
Furniture & fixture 39,000
Opening stock 120,900
Drawings & capital 96,000 420,000
Purchases & Sales 330,000 612,000
Debtors & Creditors 91,200 72,000
Returns 18,000 15,000
Loan from SBFC on 1.10.2005 @ 12 % 120,000
Wages & Salaries 79,500
Printing & Stationary 9,300
Bad debts 12,600
Provisions for doubtful debts 10,140
Cash at bank 77,640
1249,140 1249,140

Adjustments:
 Closing stock was valued at Rs. 150,000
 Depreciate Land & Building at 2.5%, Plant & Machinery at 10% and Furniture &
Fixture at 5%.
 Write off Rs. 7,200 bad debts from debtors.
 Maintain Reserve for doubtful debts at 8%.

8-From the following Trial Balance of a merchant prepare Income statement and
balance sheet as on December 31st, 2011.
Machinery 12,000 Creditors 12,408
Debtors 10,690 Discount 627
Bank 3,151 Sales 11,439
Stock (opening) 2,920 Capital 18,390
Purchases 9,092
Drawings 250
Carriage 600
Wages 1,910
Salaries 1,300
Insurance 119
Postal expenses 132
Bad debts 700
42,864 42,864
Adjustments:
 Closing stock on 31st December, 2011 was valued at Rs. 7928.
 28

 Outstanding wages Rs. 300

 Prepaid insurance Rs. 50
 Create bad debts reserve at 10 % on sundry Debtors.
 Depreciate Machinery by 5% p.a.

9-The following are the balances extracted from the books of A.Rashid as at 31 st
December, 2011
Capital 90,000 Bad debts Reserve 3,240
Drawings 7,600 Taxes & Insurance 1,300
Purchases 89,470 Discount (Cr.) 190
Purchases return 4,240 Bills Receivable 1,240
Sales 149,840 Sundry Debtors 62,970
Sales return 2,820 Sundry Creditors 16,980
Stock (1-1-2011) 11,460 Cash at Bank 12,400
Salaries & wages 6,280 Cash in Hand 2,210
Buildings 25,000 Office Furniture 3,500
Freight & clearing 16,940 Travelers Salaries & Comm. 9,870
charges
Carriage inwards 2,310 Plant & Machinery 7,000
Office expenses 1,340 Rent recovered 2,100
Printing & Stationery 660
Postage & Telegrams 820
Bad Debts 1400

Your are required to prepare Income Statement for the year ended 31st December, 2011
and Balance Sheet as on that date, after making the following adjustments.

 Depreciate building by 2.5% and office Furniture by 5 % p.a.

 Reserve for bad debts to be made up to Rs. 4000.
 Salaries outstanding for December 2011 Rs. 570.
 Rent recoverable Rs. 200.
 5 % interest to be charged on Capital.
 The value of stock on 31st December, 2011 was Rs. 14290.
 The unexpired insurance amounted Rs. 240