DEPARTMENT OF HUMANITIES

Accountancy
M4

Samitesh Brahma
Assistant Professor
Department of Humanities
Jorhat Engineering College
 Module 4
✔ Bad debts

✔ Provision for bad and doubtful debts

✔ Provision for discount on debtors

✔ Outstanding expenses

✔ Prepaid expenses

✔ Accrued Income
 Adjustment entries
• While preparing Final accounts it must be detected whether there is a
transaction

I. which has been omitted to be recorded in the books, or

II. Which has been wrongly recorded in the books, or

III. Of which only one aspect has been recorded in the books.

Entries passed for such transactions are called ‘Adjustment entries’.

Objectives or Need of adjustments
1. To ascertain the true Net Profit or loss of the business.

2. To ascertain the true financial position of the business.

3. To make a record of the transaction omitted from the books.

4. To rectify the errors committed in the books of accounts.

5. To make a record of such incomes which have accrued but not have been
paid.

6. To provide for depreciation and other provisions

Important adjustments

1. Outstanding expenses

2. Prepaid expenses

3. Accrued Income

4. Bad debts

5. Provision for bad and doubtful debts

6. Provision for discount on debtors

 Outstanding expenses or Expenses Due but not paid

✔These are the expenses which have been incurred during the
year but have been left unpaid on the date of preparation of
final accounts.

Treatment in Final Accounts:- Outstanding Expenses on the

one hand, will be added to the concerned expenses on the debit
side of the Trading or Profit and Loss account and on the other
hand, will also be shown on the liabilities side of Balance
Sheet. It is a Personal Account because it represents those
persons to whom the payment is to be made.
Example: Extracts of Trial balance as at 31st March, 2020
Name of account Dr. Balances (₹) Cr. Balances (₹)
Wages 2,20,000
Salaries 55,000

Adjustments :- Wages ₹20,000 and salary ₹ 5,000 are outstanding.

Solution:- Adjustment entries

Dr. (₹) Cr. (₹)

Wages A/c Dr. 20,000
To Outstanding expenses A/c 20,000
(Wages Due)
Salary A/c Dr. 5,000
To outstanding expense A/c 5,000
(Salary due)
Effects on Final accounts:-
Dr. Trading A/C Cr
Particulars ₹ Particulars ₹
To wages 2,20,000
Add: Outstanding wages 20,000 2,40,000

Dr. Profit and Loss account Cr.

Particulars ₹ Particulars ₹
To Salary 55,000
Add: Outstanding salary 5,000 60,000

Balance Sheet
Liabilities Amount (₹) Assets Amount(₹)
Outstanding wages 20,000
Outstanding Salary 5,000
If the outstanding expenses are shown in the trail Balance, it means that
the adjusting entry is already passed. In effect, outstanding expenses are
already included in the expense shown in the Trail Balance. In such
case, outstanding expenses are shown in the balance sheet only as
current liability.
Prepaid expenses or Expenses paid in advance
✔These are the expenses which have been paid in advance for
the next year during the current year itself.

Treatment in Final Account:- Prepaid Expenses on the one

hand, will be deducted from the concerned expenses on the
debit side of Trading or Profit and loss Account and on the
other hand, will also be shown on the Assets side of the
Balance Sheet. Prepaid Expenses is a Personal Account
because it represents those persons to whom the payment has
been made in advance.
Example: Extracts of Trial balance as at 31st March, 2020

Name of account Dr. Balances (₹) Cr. Balances (₹)

Insurance A/c 20,000

Adjustments :- Prepaid Insurance amounted to ₹5,000

Solution:- Adjustment entries

Dr. (₹) Cr. (₹)

Prepaid Insurance A/c Dr. 5,000
To Insurance A/c 5,000
(Insurance Paid in Advance)
Effects on Final accounts:-

Dr. Profit and Loss account Cr.

Particulars ₹ Particulars ₹
To Insurance 20,000
Less: Prepaid Insurance 5,000 15,000

Balance Sheet
Liabilities Amount (₹) Assets Amount(₹)
Prepaid Insurance 5,000
When prepaid expenses are shown in the Trail balance, it means that the
adjusting entry has already been passed. In such a case, Prepaid
expenses, as shown in Trail Balance, are shown in the balance sheet
only as current asset.
 Accrued Income or Income Receivable

✔It is quite common that certain items of income such as

interest on securities, rent, etc., are earned during the current
year but have not been actually receive by the end of the
current year. Such incomes are known as ‘Accrued Income’.

Treatment in Final Account:- Such Incomes on the one hand,

will be shown on the credit side of the P&L Account and on
the other hand, will be shown on the Assets side of the Balance
Sheet because the amount is yet to be received.
Example: Extracts of Trial balance as at 31st March, 2020

Name of account Dr. Balances (₹) Cr. Balances (₹)

Commission Received 15,000

Adjustments :- Commission earned but not received ₹3,000

Solution:- Adjustment entries

Dr. (₹) Cr. (₹)

Accrued Commission A/c Dr. 3,000
To Commission Received A/c 3,000
(Commission Receivable)
Effects on Final accounts:-

Dr. Profit and Loss account Cr.

Particulars ₹ Particulars ₹
By Commission 15,000
Add: Accrued Commission 3,000 18,000

Balance Sheet
Liabilities Amount (₹) Assets Amount(₹)
Accrued Commission 3,000
When accrued income is given in trail balance, it means its adjustment
entry is already passed. In such a case, the accrued income is shown in
the balance sheet only as current asset
 Bad Debts
✔When it becomes certain that a particular amount will not be
recovered it is known as ‘Bad-Debts’. Bed-debt is
undoubtedly a loss to the firm is therefore written on the debit
side of the P&L Account.

Treatment in Final Accounts:- Bad-Debts of ₹ 10,000 given in

adjustments will be added to the Bad-Debts of ₹ 8,000 on the
debit side of the P&L account and the amount of ₹10,000 will
also be deducted from Debtors on the assets side of the
Balance Sheet.
Bad debts account given in the Trail Balance: it means the entry for bad
debts is already passed in the books and already deducted from the sundry
debtors. In such a case, the amount of bad debts will be transferred to the
P&L account.

Bad debts is given outside the Trail balance, as an adjustment: it means

entry for such bad debts is yet to be passed in the books of account. Such
bad debts are known as further bad debts. It means the amount of sundry
debtors in the trial balance is before the deduction of bad debts.
1. In the debit side of P&L accounts, these are shown as additions to Bad debts;
2. In the assets side of Balance sheet, these are deducted from sundry Debtors.
Example: Extracts of Trial balance as at 31st March, 2020

Name of account Dr. Balances (₹) Cr. Balances (₹)

Bad-Debts 8,000
Sundry Debtors 2,00,000

Adjustments :- Write off further Bad-Debts ₹10,000

Solution:- Adjustment entries

Dr. (₹) Cr. (₹)
Bad-debts A/c Dr. 10,000
To Sundry Debtors A/c 10,000
(Further Bad-Debts written off)
Effects on Final accounts:-

Dr. Profit and Loss account Cr.

Particulars ₹ Particulars ₹
To Bad-debts 8,000
Add: Further Bad-debts 10,000 18,000

Balance Sheet
Liabilities Amount (₹) Assets Amount(₹)
Sundry Debtors 2,00,000
Less: further Bad-Debts 10,000 1,90,000
 Provision for Bad and Doubtful Debts
✔ Even after deducting the amount of actual bad-debts from the debtors, the
list of debtors at the end of the year may include some debts which are either
bad of doubtful. As the amount of actual loss on amount is realized from
debtors, a provision is created to cover any possible loss on account of
bad-debts likely to occur in future. Such a provision is created at a fixed
percentage on debtors every year and is called ‘Provision for Bad and
Doubtful Debts’

Treatment in Final Accounts:- The amount of Provision and doubtful Debts

on the one hand, is shown on the debit side of the P&L account and on the
other hand, is deducted from Sundry Debtors on the assets side of the Balance
sheet, so that the debtors may appear at their realizable value in the balance
sheet.
Example: Extracts of Trial balance as at 31st March, 2020

Name of account Dr. Balances (₹) Cr. Balances (₹)

Debtors 60,000

Adjustments :- Create a provision for bad and doubtful debts@ 5% on Debtors

Solution:- Adjustment entries

Dr. (₹) Cr. (₹)

Profit and Loss A/c Dr. 3,000
To Provision for Bad and Doubtful 3,000
Debts A/c
(provision at 5% on debtors)
Effects on Final accounts:-

Dr. Profit and Loss account Cr.

Particulars ₹ Particulars ₹
To Provision for Bad and 3,000
Doubtful Debts

Balance Sheet
Liabilities Amount (₹) Assets Amount(₹)
Debtors 60,000
Less: Provision for bad and 57,000
doubtful debts 3,000
 Provision for discount on debtors
✔Discount thus allowed will be an expense of the business and
is therefore debited to the P&L account. Since there will be
certain debtors will make early payment in the next
accounting year and will be allowed such discount, a
provision for such discount is created in the current year
itself.

Treatment in Final Accounts:- Such provision is shown on the

debit side of the P&L account and is also deducted from
Sundry Debtors on the assets side of Balance Sheet.
Example: Extracts of Trial balance as at 31st March, 2020

Name of account Dr. Balances (₹) Cr. Balances (₹)

Sundry Debtors 1,00,000

Adjustments :- Create a provision for discount on sundry debtors@ 5%.

Solution:- Adjustment entries

Dr. (₹) Cr. (₹)

Profit and Loss A/c Dr. 5,000
To Provision for discount on 5,000
Debtors A/c
(provision at 5% on debtors)
Effects on Final accounts:-

Dr. Profit and Loss account Cr.

Particulars ₹ Particulars ₹
To Provision for discount 5,000
on debtors

Balance Sheet
Liabilities Amount (₹) Assets Amount(₹)
Sundry Debtors 1,00,000
Less: Provision for discount on 95,000
debtors 5,000