Important Adjustments and their effects in Final Accounts:

1. Closing Stock – Goods remained unused at the end of

accounting year i.e. Unsold stock is called as Closing Stock. It
may be valued at Cost and at Market Price, whichever is
MINIMUN will be considered.

Effects:
i. Trading A/c - Credit side
ii. Balance Sheet - Assets side

2. Interest on Capital
i. Add to capital in balance sheet
ii. Profit and loss A/c Debit side

3. Interest on Drawings
i. Added to Drawings in balance sheet and then deducted
from Capital
ii. Profit and loss A/c Credit side as it is income of business.

4. Outstanding / Unpaid Expenses

i. Add to the respective expense in Trading or Profit and

Loss A/c
ii. Balance sheet Liabilities side

5. Prepaid / Advance Expenses

i. Deduct from the respective expense in Trading or

Profit and Loss A/c
ii. Balance Sheet Assets Side
6. Outstanding / Unreceived Income
i. Add to Income item in Profit and loss a/c credit side
ii. Balance Sheet Assets side

7. Income received in advance /Advance income :

i. Deduct from income item of profit and loss a/c
ii. Balance sheet liabilities side

8. Depreciation on fixed asset – (reduction in the value of an

asset)
Fixed assets are – land and building, Furniture, fixtures, plant
and machinery, premises , motor cars etc.

i. Deduct from respective fixed assets – asset side

ii. P& L A/c Debit side (expense )

9. Discount on debtors
i. Deduct given percentage from debtors
ii. P & L A/c Debit side

10. Discount on Creditors

i. Deduct from Creditors - Balance Sheet Liabilities side
ii. P & L A/c Credit Side

11. Adjustment regarding Bad debt and doubtful debts

i. When bad debts are given in trial balance

P & L A/c Debit side (only one effect as it is Trial
Balance)
 ii. When bad debt amount in rupees is given in
adjustments
A) P & L A/C Debit side - add to old bad debt
B) Deduct from balance sheet debtors

12. Reserve for Doubtful Debts

Old Bad debts (from Trial Balance)

+ New Bad Debts (from Adjustment)
+ New Reserve For doubtful debts (from Adjustment)
---------------------------------------------------------
- Old Reserve For doubtful debts (from Trial Balance)