Adjusting entry First aspect 2nd aspect Reason

Closing Stock On the asset of balan On the cr. Side of tradign account
Outstanding expenses On Liabilities side Add in expenses : in P&L A/c application of accrual concep
Prepaid expenses or Unexpired expenses orOn asset of balance On P&L a/c : take it on cr. Side; why is it an asset? Money is a
Depreciation On Balance sheet : re In P&L A/c: treat it as expense
Accrued Income or outstanding income or iOn asset of balance In P&L A/c: on credit side why on credit side of p&l a/c
Interest on capital on balance sheet : Add In P&L A/c: treat it as expense revenue expenditure
Interest on Drawings On Balance sheet: dedIn P&L A/c: treat it as income income for business
Interest on Loan create a liability as expense
Bad debts reduce from debtors add to existing bad debts or treaunrealisable amount is bad d
Provision for bad and doubtful debts deducted from the amdebit side of p&L a/c
if the provision for bad debts is already there, and you create another one: what would you do?
Provisioni for discount on debtors subtract from debtorsexpense on P&L A/c
Provision for discount on creditors reduce the liability credit side of P&L A/c
Loss by accident loss in P&L A/c
if loss is of goods reduce the value of goods/purchases
loss is of any asset reduce the value of asset
if you have an insurance claim whatever is the net loss : treat as loss
show insurance claim on asset side
goods given as charity reduce from purchaseshow on debit side
goods given as free samples reduce from purchaseshow on debit side
manager's commission

contigent liabilities
application of accrual concept , matching concept;It says that the expenses of current year must be matched with the income of current
why is it an asset? Money is already paid. Benefit will be received in future

why on credit side of p&l a/c?

revenue expenditure
income for business

unrealisable amount is bad debtswhy do weaim is to reduce the net profit

would you do?

ed with the income of current year
eg. Of prepaid expenses
prepaid insurance Particulars Amt ParticularsAmt
To insurance
Less: prepaid

eg. Depreciation of Rs. 5,000 Particulars Amt ParticularsAmt

To depreciation 5,000

Explanation for matching concept

situation 1: Consider what you have received (situation 2: consider accrual basis (i.e
Current year income
received in cash 100,000 income 100,000 Income 120,000
to be received 20,000 Less: expenses 60,000 Less: expe 60,000
Profit 40,000 Profit 60,000
Current year's expenses Less: tax @40% 16,000 Less: tax 24,000
operating expenses 60,000 PAT 24,000 PAT 36,000
this belongs to equity shareholders
what will be the consequences?
ramifications will follow in the further years

next year
income is 70,000 income 90000 income 70,000
expenses 60,000 Less: expenses 60,000 Less: expe 60,000
Profit 30,000 Profit 10,000
Less: tax @40% 12,000 Less: tax 4,000
PAT 18,000 PAT 6,000
this indicates a breach of matching concept, alongwith dist

eg. Provision for bad debts

there is already a provision in the trial balance of Rs. 800, and a new provision for bad debts of Rs. 1500 is created, what woul

already have a provision of 800 Particulars Amt ParticularsAmt

we need an additional provision of 700
so that the provision turns out to be 1500 to additional provision 700
For understanding manager's commission

eg. suppose the selling price of a good is Rs. 120 and the profit is 20% on selling price. Whats the cost price?
Selling Price 120
less: Cost price 96
Profit 24

suppose the selling price of a good is Rs. 120 and the profit is 20% on cost price. Whats the cost price?
Selling Price 120
less: Cost price
Profit

Let's assume cost price be x.

then, profit is 20% of x
what is selling price cost price + profit
120 x + (20% of x)
what is x?

eg. manager's commission is 10%, and net profit is calculated before charging such commission

net profit is calculated after charging the manager's commission

eg. Commission is 10% and net profit before commission is 33,000
 Liabilities Amt Assets Amt
Prepaid insurance

Liabilities Amt Assets Amt

Plant
Less: depreciation 5000

2: consider accrual basis (i.e. match the current year's revenue with current year expenses)

(actual + receivable)

which one gives you a rosy picture of business?

hing concept, alongwith disturbs the business on aspect of financial obligations & tax payments

1500 is created, what would be the treatment in P&L A/c

s the cost price? when manager's commission is % of net profit

the cost price? when manager's commission is % after charging such commision
two types of expenses accounting treatment of expenses
Revenue expenditure treated as expense in P&L A/c

Capital expenditure amortized on balance sheet this is reason that we reduce the value of assets via depreciati
e value of assets via depreciation
 Trading A/c Profit & Loss Account
Particulars Amt Particulars Amt Particulars Amt
To Purchas 80,000 By Sales 140,000
Less: purch 4000 Less: retur 5,000 135,000 To S expenses 600
Less: draw 2000 By closing stock 27,300 To Printing & Stationary 500
Add: omitt 6,000 80,000 By loss of goods (by fi 10,000
To depreciation 1800
To Opening stock 21,300 To depreciation 4,000
To depreciation 250 6,050
To interest on loan for ni 1,350
To Carriag 10,000 10,000
To salaries and wages 18,500
To Gross profit 61,000 To Trade expenses 800
To loss of goods (by fire) 10,000
To Insurance ex 1000
Less: prepaid 200 800
To bad debts 400
Add: further ba 400
Add: provision 900
Less: provision for doubtful 1,700

To discount on 342 342

To net profit 32,098

provisison for doubtful debts (cr. Balanc 1000

provision for discount on debtors (cr. B 380

Note: the claim for loss of goods is a pending with the company and got accepted on 10th April 1999 for Rs. 6,000
Profit & Loss Account Balance Sheet
Particulars Amt Liabilities Amt Assets Amt
by Gross profit b/d 61,000 Capital 100,000 Cash at bank 4,600
By Profit of textile d 10,000 Less: Draw 12,000 Cash in hand 1,280
Less: furth 2,000 Prepaid insurance 200
By old provision of do 1000 Add: net pr 32,098 118,098 Debtors 18,400
By discount on debtor 380 Less: furth 400
by discount on credit 360 revised de 18,000
Less: provi 900
17,100
Less: disco 342 16,758
Closing stock
Creditors 12,000 Textile 8,000
Add: omitt 6,000 General 27,300
Less: reser 360 17,640 Fixed Assets
Long term liability
Loan 30,000 Land & Bui 90,000
Add; Intere 1,350 31,350 Less: depre 1,800 88,200
P&M 20,000
Less: depre 4000 16,000
Furniture 5,000
Less: depre 250 4,750
Insurance claim
167088 167,088

ril 1999 for Rs. 6,000