Final Accounts with Adjustments

Adjustments
• Closing Stock
• Outstanding Expenses
• Prepaid Expenses
• Accrued incomes
• Income received in advance
• Depreciation
• Bad debts
• Provision for bad and doubtful debts
 Closing stock
• The unsold goods in stock at the end of the
accounting period is called as closing stock.
• This is to be valued at cost or market price
whichever is lower.
Example:
• The value of closing stock shown outside the
trial balance on 31.3.2014 is Rs.1,00,000.
Closing stock A/c …………………….Dr
To Trading A/c

Value of closing stock will appear

• i) in the trading account as deduction from
COGS( opening stock+(Purchase-Purchase
Return)+Direct expenses-Closing stock)
• ii) on the (Current asset)assets side of balance
sheet.
 Outstanding Expenses
• Expenses which have been incurred but not
yet paid during the accounting period for
which the final accounts are being prepared
are called as outstanding expenses.
Example: Trial balance shows salaries paid
Rs.22,000.
• Adjustment: Salary for March 2014, Rs.2,000
not yet paid.
Salaries A/c ………………………….Dr
To Salaries outstanding A/c

Outstanding expenses will be shown

• i) In the Profit and Loss account by way of
additions to the particular expenses and
• ii) on the liabilities side (CL) of the Balance
Sheet.
 Prepaid Expenses
• Expenses which have been paid in advance are
called as prepaid (unexpired) expenses.
Example:Trial Balance for the period ending
31st March, 2014 shows Rs.15,000 as
insurance premium.
Adjustment: Prepaid Insurance premium
Rs.7,500.
Prepaid Insurance Premium A/c …………Dr
To Insurance Premium A/c

Prepaid expenses will be shown

• i) In the Profit and Loss account by way of
deduction from the particular expenses and
• ii) on the assets side (CA)of the Balance Sheet.
From the following trial balance of a trader, make out an Income Statement and Balance Sheet as on 31st
March 2015.
Particulars Debit Credit
• Sales 420000.00
• Purchases 105000
• Printing Charges 2500
• Wages 77500
• Salaries 12500
• Opening Stock 225000
• Carriage Inwards 8800
• General Expenses 26250
• Trademarks 5000
• Rent paid 2500
• Capital 174800.00
• Discount received 1250.00
• Loan 175000.00
• Buildings 200000
• Furniture 25000.00
• Machinery 50000.00
• Cash 1000.00
• Bank 30000.00
Total 771050 771050.00
Adjustments:
1. The closing stock was valued at Rs.3,20,000.
2. Outstanding Salaries Rs.10,000.
3. Prepaid rent Rs.500.
Accrued Incomes or Outstanding Incomes

• Income which has been earned but not

received during the accounting period is called
as accrued income.
Example: Credit side of Trial Balance
(31.3.2014) shows commission received
Rs.8,000.
Adjustment: Commission accrued but not yet
received Rs.2,000.
• Accrued commission A/c ……….Dr
To Commission received A/c

Accrued income will be shown

• i) In the Profit and Loss account by way of
addition to particular income and
• ii) on the assets side (CA) of the Balance Sheet
 Incomes Received in Advance
• Income received during a particular
accounting period for the work to be done in
future period is called as income received in
advance.
Example: Trial Balance for the period ending
31st March, 2014 shows Rent received
Rs.25,000.
Adjustment: Rent received in advance Rs.5,000.
Rent received A/c ………….Dr
To Rent received in advance A/c

Incomes received in advance will be shown

• i) In the Profit and Loss account by way of
deducting from the particular income and
• ii) on the liabilities side (CL)of the Balance
sheet.
 Debit Credit
Particulars
Rs. Rs.

Machinery 40,000 Adjustments:

Cash at Bank 10,000
Cash in Hand 5,000
Wages 10,000
1. Closing Stock
Rs.80,000
Purchases 80,000
Stock (01.04.2017) 60,000
Sundry debtors 40,000
Bills Receivable 29,000
2. Interest on Bank
loan not yet paid Rs.400
Rent 4,000
Interest on Bank Loan 500
Commission received 3,000 3. Commission
General Expenses 12,000 received in advance
Salaries 7,500 Rs.1,000
Discount received 4,000
Prepare Profit and loss
Capital 90,000
Statement for the year
Sales 1,20,000
ended31.03.2018 and
Bank Loan 40,000
Balance Sheet as on that
Sundry Creditors 40,000 date after giving effect to
Purchase returns 5,000 the above adjustments
Sales returns 4,000
3,02,000 3,02,000
 Depreciation
• Depreciation is the reduction in the value of
fixed assets due to its use or obsolescence.
Generally depreciation is charged at some
percentage on the value of fixed asset.
Example: The Trial balance shows the value of
furniture on 31.3.2004 as Rs.60,000.
• Adjustment: Furniture is to be depreciated at
10%.
Depreciation A/c……………………… Dr
To Furniture A/c

Profit & Loss A/c ……………………….Dr

To Depreciation A/c

Depreciation will be shown

• i) In the Profit and Loss account as expenses
• ii) on the assets side of the Balance Sheet by
way of deduction from the value of concerned
asset.
 Bad Debts
• Debts which cannot be recovered are called
bad debts. It is a loss for the business.

Example: The trial balance as on 31st March

2014 shows, Sundry debtors/Account
Receivables Rs.52,500.
• Adjustment: Write off Rs. 2,500 as bad debts.
Bad debts A/c ……………….Dr
To Sundry debtors / AR A/c

Profit & Loss A/c ……………Dr

To Bad debts A/c

Bad debts will be shown

• i) In the Profit and Loss account and
• ii) on the assets side of the Balance Sheet by
way of deduction from sundry debtors/ AR.
 Provision for Bad and Doubtful Debts
• This Provision for bad and doubtful debts is
generally provided at a certain percentage on
Debtors/AR, based on past experience.
• While preparing final accounts, the bad debts
written off given in adjustment is first
deducted from the Sundry debtors / AR then
on the balance amount (Sundry debtors /AR –
Bad debt written off) provision for bad and
doubtful debts calculated.
Example: The trial balance shows on 31.3.2014, Sundry
Debtors / AR as Rs.60,000.
• Adjustment: Provide 5% provision for bad & doubtful debts
on Sundry debtors.

Profit & Loss A/c…………………………. Dr

To Provision for bad & doubtful debts A/c

Provision for bad and doubtful debts will be shown

• i) In the Profit and Loss Account, If there is old provision ,it
has to be deducted from the new provision
• and
• ii) on the assets side of the Balance sheet by way of
deduction from Sundry debtors / AR (after Bad debts written
off if any).
• Example : The Trial Balance as on 31st March
2014 shows the following:
• Sundry Debtors Rs. 81,200
• Adjustment: Write off Rs.1,200 as bad debts.
Create a provision for Bad and doubtful debts
@ 5% on Sundry Debtors.
 Debit Credit
Particulars
Rs. Rs.
Adjustments:
Stock on 1.4.2004 1,50,000
Purchases 1,30,000 1. Closing Stock Rs.1,20,000
Sales 3,00,000 2. Provide 5% for bad & doubtful debts
Carriage inwards 2,000 on debtors
Salaries 50,000 3. Depreciate machinery & furniture by
5%
Printing and Stationery 8,000
4. Prepaid printing charges Rs.2,000
Drawings 17,000
Sundry Creditors 20,000
Sundry debtors 1,80,000
Furniture 10,000
Capital 2,50,000
Postage & Telephone 7,500
Interest paid 4,000
Machinery 41,500 Mr.Senthil’s book shows the following
Loan Account 25,000 balances. Prepare his Income Statement
Bills Payable 5,000 for the year ended 31st March 2005 and
6,00,000 6,00,000 the Balance sheet as on date.
The following information was extracted from the books of Mr. Abhinandan as on 31 st Dec. 2012.
Balances Amount (Rs.) Balances Amount
(Rs.)
Plant and Machinery 20,000 Factory lighting 950
Wages 34500 Opening stock 34200
Salaries 15850 Motor car 12000
Furniture 10000 Purchases 102000
Freight on Purchase 1860 Sales return 3100
Freight on sales 2140 Bad debt 1400
Building 24000 Cash at bank 4200
Manufacturing expenses 9500 Interest and bank charges 400
Insurance 4250 Cash in hand 1120
Goodwill 25000 Capital 80000
General expenses 8200 Sundry creditors 44560
Fuel and power 1280 Bank loan 15000
Sundry debtors 78200 Purchase return 1740
Sales 250850
Provision for bad debt 2000
 Additional Information

• Stock in hand on 31st Dec. 2012 was Rs. 30500

• Depreciate plant and machinery by 10% p.a,
furniture by 5% p.a., and motor car by Rs. 1000
• Bring provision for bad debt for 5% on debtors.
• A commission of Rs. 2099 is to be provided to the
general manager not yet paid.
• Prepare the trading and profit and loss statement for
the year ended 31/12/2012 and balance sheet as at
the date.