5b. Final Accounts - Adjustments

FINAL ACCOUNTS: 

FINAL ACCOUNTS ADJUSTMENT ENTRIES

The adjustments relates to the following:: 

The adjustments relates to the following : Closing stock Outstanding expenses Prepaid expenses Outstanding or accrued income Income received in advance or unearned income Depreciation Bad debts Provision for bad debts Provision for discount on debtors Reserve for discount on creditors Interest on capital Interest on drawings Rule : Any item given outside the Trial Balance will be recorded at two places on account of Dual Aspect concept.

Closing stock . The journal entry would be: Closing stock A/c Dr. To Trading A/c : 

Closing stock . The journal entry would be: Closing stock A/c Dr. To Trading A/c Ex: Trial Balance Stock at the end of the period is Rs 15000 Dr. Trading Account Cr. Balance Sheet Particulars Dr. Amt. Cr. Amt. Opening stock Purchases Sales 10000 30000 40000 Particulars Amount (Rs) Particulars Amount (Rs) To, Opening Stock To, Purchase To, Gross Profit 10000 30000 15000 55000 By, Sales By Closing Stock 40000 15000 55000 Liabilities Amount Assets Amount Closing Stock 15000

Outstanding Expenses: Expenses which have become due during the a/cing period but not paid till the end of the year. In order to ascertain true profit and loss made during the year, it is necessary that such outstanding expenses are taken into account.: 

Outstanding Expenses : Expenses which have become due during the a/cing period but not paid till the end of the year. In order to ascertain true profit and loss made during the year, it is necessary that such outstanding expenses are taken into account. Trial Balance Additional Information : Salary for the month of December Rs 2000 has yet not been paid Rent amounting to Rs 1000 is still outstanding. Journal Proper Particulars Dr. Amount Cr. Amount Salaries A/c Office Rent A/c 10000 5000 Date Particulars Dr. Amount Cr. Amount Salaries A/c Dr To Outstanding Salaries A/c (Being Salary due but not paid) Office Rent A/c Dr To Outstanding Rent A/c (Being Rent due but not paid) 2000 1000 2000 1000

Prepaid Expenses: Expenses of next accounting period paid in advance in the current accounting period.: 

Prepaid Expenses : Expenses of next accounting period paid in advance in the current accounting period. Ex: Trial Balance Additional Information : Insurance Premium has been paid in advance amounting to Rs.1000 for the next year Rent Rs 500 has been paid for the next year Journal Proper Particulars Dr. Amount Cr. Amount Insurance Store Rent 8000 4000 Date Particulars Dr. Amount Cr. Amount Prepaid Insurance A/c Dr. To, Insurance A/c (being Insurance Premium paid in advance) Prepaid Rent A/c Dr. To, Store Rent A/c (Being Rent paid in advance) 1000 500 1000 500

Profit and Loss Account: 

Profit and Loss Account Balance Sheet Particulars Amount Particulars Amount To, Salaries 10000 Add: Outstanding Salaries 2000 To, Office Rent 5000 Add: Outstanding Rent 1000 To, Insurance 8000 Less: Prepaid 1000 To, Store Rent 4000 Less Prepaid 500 12000 6000 7000 3500 Liabilities Amount Assets Amount Outstanding Expenses: Outstanding Salaries 2000 Outstanding O. Rent 1000 3000 Prepaid Insurance Prepaid S. Rent 1000 500

Slide 7: 

Outstanding Income : Income which has become due but not received yet. ( Asset ) Treatment: Added to the income received in the credit side of the Profit and Loss account and then shown as an asset in the Balance sheet. Accrued Income : Income which has been earned by the business but has not become due and therefore not received yet. ( Asset ) Treatment: Similar to Outstanding Income Income Received in advance : income which has been received by the business before being earned by it. ( liability ) Treatment: Subtracted from the Income received in the Credit side of the Profit and Loss account and then shown as a liability in the Balance sheet.

Ex: Trial Balance (as on 31st December,1998) Additional Information: Interest on M.T. Loan has been received in advance to the . extent of Rs 500: 

Ex: Trial Balance ( as on 31 st December,1998) Additional Information: Interest on M.T. Loan has been received in advance to the . extent of Rs 500 Particulars Dr. Amount Cr. Amount 6% L.T. Loan Investment in 6% Debentures in B Ltd. (Interest payable on 31/3 & 30/9) Interest on L.T. Loan received up to 31 st October, 1998 Interest on Investment Rent received for 12 months ending 31 st March, 1999 Interest on M.T. Loan 20000 30000 1000 900 1200 2000 Journal Entries : Outstanding Interest A/c Dr. 200 To, Interest on L.T. Loan account 200 Accrued Interest A/c Dr. 450 To, Interest on investment A/c 450 Rent A/c Dr. 300 To, Rent received in advance A/c 300 Interest on M.T. Loan A/c Dr. 500 To, Interest received in advance A/c 500

Profit and Loss A/c : 

Profit and Loss A/c Balance Sheet Particulars Amount Rs. Particulars Amount Rs. By, Interest on L.T. Loan 1000 Add: O/s Interest 200 By, Interest on Investment 900 Add: Accrued Interest 450 By, Rent received 1200 Less, Rent rec. in adv. 300 By, Interest on M.T. Loan 2000 Less: Interest rec. in adv. 500 1200 1350 900 1500 Liability Amount Asset Amount Rent received in advance Interest on M.T. Loan received in advance 300 500 Outstanding Interest on L.T. Loan Accrued Interest on investment 200 450

Depreciation: Depreciation A/c Dr. To, Fixed Asset A/c Treatment: Calculate depreciation on the basis of the rate given. Charge this amount to the debit side of the Profit and Loss account. In the Balance Sheet, reduce the value of that asset by this amount.: 

Depreciation: Depreciation A/c Dr. To, Fixed Asset A/c Treatment : Calculate depreciation on the basis of the rate given. Charge this amount to the debit side of the Profit and Loss account. In the Balance Sheet, reduce the value of that asset by this amount. Bad debts and Provision for Bad debts Bad debts A/c Dr. Profit & Loss Dr. To, Debtor’s personal A/c To, Provision for Bad debts Treatment : Charge this amount (additional bad debts) to the Debit side of the P&L A/c. If the Trial balance already has an entry of Bad debts, ‘additional bad debts’ should be added to this amount . In the Balance Sheet, reduce the value of the Debtors by this ‘additional Bad debts’. Add this amount (new provision for bad debts) to the ‘Bad debts’ in the Debit side of the P&L A/c. If the Trial balance already has an entry of Provision for Bad debts, this old provision should be subtracted from the total. In the Balance sheet, reduce the value of Debtors by this new ‘provision for bad debts’. Discount to Debtors : Similar treatment like Bad debts Provision for Discount on Debtors : Similar treatment like Provision for Bad debts

Trial Balance Additional Bad debts = 1000, Additional Discount = 500 Create Provisions: Bad debts @10% & Discount @5% on Debtors : 

Trial Balance Additional Bad debts = 1000, Additional Discount = 500 Create Provisions: Bad debts @10% & Discount @5% on Debtors Journal Entries: Particulars Dr. Amount Cr. Amount Sundry Debtors Provision for Bad debts Provision for Discount Bad debts Discount 50000 3000 1000 5000 2000 Date Particulars Amount (Dr.) Amount (Cr.) Bad debts A/c Dr. Discount A/c Dr. To, Sundry Debtors Provision for Bad debts A/c Dr. To, Bad debts A/c Provision for Discount on debtors A/c Dr. To, Discount A/c Profit and Loss A/c Dr. To, Provision for Bad Debts To, Provision for Discount A/c 1000 500 4000 1500 5532.50 1500 4000 1500 3850 1682.50

Slide 12: 

Liabilities Amount Assets Amount Sundry Debtors 50000 Less: Additional Bad debts 1000 49000 Less: Additional Discount 500 48500 Less: New Prov. for Bad debts 4850 . 43650 Less: New Prov. For Discount 2182.5 41467.50 Particulars Amount Particulars Amount To, Bad debts 3000 Add: Additional Bad debts 1000 Add: New Prov. For Bad debts 4850 8850 Less: Old Prov. For Bad debts 5000 To, Discount 1000 Add: Additional Discount 500 Add: New Prov. For Discount 2182.5 3682.5 Less: Old Prov. For Discount 2000 3850 1682.5 Dr . Profit and Loss account Cr. Balance Sheet