FINAL ACCOUNTS(With Adjustments)

FINAL ACCOUNTS (With Adjustments)

Adjustment in final account means those account are not recorded or included in trial balance that can be taken into account i.e. called Adjustment. Some for example of adjustment are outstanding expenses, prepaid expenses, income received in advance, depreciation, interest on capital, interest on drawing etc.

 

Adjustments are recorded through adjusting entries the journal entry pass for adjustment at end of trading period are called adjusting entry.

OBJECTIVES OF ADJUSTMENT:

1. To records all the outstanding expenses show that all the actual expenses of current year can be account.
2. To adjust the prepaid expenses so that only expenses pertaining to the current year accounted for during the current year.

iii. To bring into recorded business transaction which have not been recorded earlier.

1. To rectify erosive any committed in the books of account.
2. To ascertain the profit or loss for the current year.
3. To complete the incomplete transaction.

IMPORTANT ADJUSTMENTS

1. Outstanding expenses (current liabilities):-

Those expenses which are due for payment in one accounting year but actually paid in future accounting year.

Adjusting entry

Salaries                            a/c.                       Dr.

To Outstanding   salaries      a/c.

(Being salary due but not paid)

Treatments;

1. It will be shown on the Dr. Side of the profit and loss account by way of addition to particular expenses.
2. Outstanding expenses will be shown on the liabilities side of the balance sheet.

3. Pre-paid expenses (current assets):-

Those expenses are paid in advance but benefit are available in future period are called pre-paid expenses.

Adjusting entry

Pre-paid expenses            a/c                    Dr.

To Particular expenses      a/c

(Being particular expenses paid in advance)

Treatment;

1. It will be shown on the debit side of the profit & loss account by way of deduction from the particular expenses.
2. It will be shown on the assets side of the balance sheet.

3. Income received in advance (Current liabilities)

Those incomes actually received and recorded but not yet earned i.e. called income received in advance.

Adjusting entry

Particular income                a/c                       Dr.

To Income received in advance a/c

(Being particular income received in advance)

Treatments:

1.   It will be shown on the credit side of the profit & loss account by way of deduction from particular income.
2. Income received in advance will be shown on the liabilities side of the balance sheet.
3. 4. Accrued income;

Those incomes which have been earned but not yet received during the accounting year is called accrued income.

Adjusting entry

Accured income                 a/c.                          Dr.

To particular income   a/c.

(Being income due but not received)

Treatment

1. it will be shown on the credit side of the profit and loss account by way of addition of the particular income.
2.   it will be shown on the assets side of the balance sheet.

3. Closing stock:

It represents the unsold at the end of the year.

Adjusting entry

Closing stock                 a/c                 Dr.

To trading           a/c

(Being stock at the end of the year)

Treatment:

1.   It will show on the credit side of the trading account.
2. It will show on the assets side of balance sheet.

3. Depreciation:

Loss in the value of fixed assets due to used in business.

Adjusting entry

Depreciation            a/c          Dr.

To particular assets   a/c

(Being decries in the value of fixed assets)

Treatment

1. It will shown on the debit side of profit &loss account.
2. It will show on the assts side of the balance sheet by way of deduction from the value of concerned assets.

3. Opening stock

Those stock are unsold previous year that can be soon opening stock in the current year.

Adjusting entry

Opening stock            a/c.           Dr.

To capital              a/c.

(Being unsold of goods)

Treatment

1. It will be shown on the debit side of trading account.
2. Same amount will be shown on the liabilities side of the balance sheet by way of addition to capital account.

3. Computation of value of expenses (material) consumed:

Some times in problem the material consumed is not given, we can find out the value of material consumed as follows;

Opening stock                          xx

Add: Purchases                        ___xx

xx

Less: Closing stock                           XX

Material consumed

Treatment:

1. It will be shown on the debit side of profit & loss account.
2. The value of closing stock of particular account will be shown on the assets side of the balance sheet.

3. Interest on capital:

The proprietor may wish to ascertain his profit after considering the interest which his loss by investing in money in the firm interest which his loss by investing in money in the firm interest to be charged in an expenses for the business an income from the proprietor.

Adjusting entry

Interest on capital             a/c            Dr.

To capital             a/c

(Being interest charged on capital)

Treatment

1. It will be shown on the debit side of profit & loss account.
2. It will be shown on the liabilities side of balance sheet by way of addition to the capital account.

3. Interest on drawing:

As the business allowed interest on capital it may be also charged interest on drawing. The interest charged is an income for the business and expenses to the owner.

Adjusting entry

Capital              a/c.                     Dr.

To Interest on drawing          a/c.

(Being interest charged on drawing)

Treatment

1. It will be shown on the credit side of profit & loss account.
2. It will be shown on the liabilities of the balance sheet by way of addition to drawing which are ultimately deductions for the capital account.

3. Goods withdrawn for domestic use :

Sometimes, the proprietor withdrawn goods for his domestic use.

Adjusting entry

Drawing              a/c           Dr.

To purchases             a/c.

(Being goods withdrawn by proprietor for personal use)

Treatment

1. The value of goods withdrawn (at cost) should be deducted from purchases on debit side of trading account.
2. Same amount is also deducted from capital in the liabilities sid of balance sheet as it is added to drawing.

3. Goods used for free samples, charity or gifts:

Sometimes the trader distributed to his customers as free sample for publicity of the product, this result in reduction of stock of the trader.

Adjusting entry

Advertisement      a/c.        Dr.

To purchases   a/c.

(Being goods distributed as free samples or gift now recorded)

Treatment

1. It will be shown on the debit side of trading account by way of deduction from purchases.
2. Same amount is also soon on the debit side of profit & loss account.

3. Goods (materials) used for manufacturing assets:

Sometimes trader takes out apart of goods from business for manufacturing fixed assets for the business and same wages are also incurred on it. It results in reduction of goods at shop but the value asset on other hand will increase.

Adjusting entry

Particular assets                 a/c                  Dr.

To purchases            a/c.

(Being asset manufactured)

Treatment

1. The value of materials used for making the business assets will be deducted from purchases on the debit side of trading account.
2. Some amount is also added to particular asset in the balance sheet.

3. Bad debts to be written off:

Bad debts are irrecoverable debts from customers, during the course of the financial year.

Adjusting entry

Bad debts         a/c.            Dr.

To Customer (particular)   a/c.

(Being irrecoverable debts from customer)

Treatment

1. When it appears inside the balance it is shown on the debit side of profit & loss account only
2. When bad appears in adjustment it is shown on the debit side of profit & loss account and deducted from debtor in balance sheet.

iii. When bad debt appears both in trial balance and in adjustment both existing bad debt and further bad debt appears in profit & loss account and further bad debt amount is deducted from debtor in balance sheet.

15. Provision for bad debts:

Provision for bad debts is an attempt to anticipate possible losses due to bad debts and to keep aside an amount against the profit to meet the loss estimated in the following year.

Adjusting entry

Profits & loss           a/c       Dr.

To provision for bad debts            a/c.

(Being provision for doubtful debt is made)

Treatment

1.    It will shown on the debit side of the profit & loss account by way of addition to bad debt (old provision for doubtful debt at the beginning of the year will be deducted)
2. It shown on the assets side of the balance sheet by way of deduction from sundry debtors(After deduction of further bad debts if any)

3. Provision for discount on debtor:

Sometime the trader allow discount to customers form prompt payment and it constitutes a substantial sum. Sometimes the goods are sold on credit to customers in one accounting period whereas the payment of the same is made by them in the next accounting period and discount is to be allowed to them. It is prudent policy to change this expenditure to the period in which sales have been made so a provision of doubtful debts.

Adjusting entry

Profit & loss                 a/c.                                     Dr.

To provision for discount on debtor    a/c.

(Being provision for discount on debtor is mad)

Treatment

1. It will be shown on the debit side of profit & loss account.
2. It will shown on the assets side of the balance sheet by way of deduction from sundry debtors. (After deduction of further bad debt and provision for doubtful debt if any)

3. Reserve for discount on creditors:

As the firm has to provided for discount on debtors, similarly the firm may have change to receive discount on the lost date of the accounting year if the payment is made with in the scheduled. Such discount on creditor is anticipated profit and therefore reserve for discount on creditor.

Adjusting entry:

Reeserve for discount on creditor       a/c.        Dr.

To Profit and loss       a/c.

(Being provision for discount it made)

Treatment

1. It is shown on the credit side of the profit and loss account.
2. It will be shown on the liabilities side of the balance sheet by way of deduction from sundry creditors.

3. Abnormal loss of stock due to accident:

It is a profit of stock is lost or destroyed due to an accident the cost of such stock is abnormal loss.

1. a) All the stock is fully insured
2. b) The stock is partly insured
3. c) The stock is not insured at all
4. a) All the stock is fully insured:

Adjusting entry

Insurance claim       a/c.        Dr.

To Loss by fire          a/c.

(Being amount due for insurance company against fire claim)

Treatment

1. It will be shown on the credit side of trading account.
2. It will be shown on the assets side of balance sheet.

3. b) The stock is partly insured:

Profit & loss                 a/c.      Dr.

Insurance  claim       a/c.        Dr.

To Loss by fire    a/c.

(Being claim accepted for loss & balance transported to profit & loss account)

Treatment

1. It will be shown on the credit side of the trading account with the full value of stock.
2. It will be shown on the debit side of the profit & loss account with the part of stock which is not insured.

iii. Loss of stock by fair will be shown on the assets side of the balance sheet with the amount is to be realized from the insurance company.

1. c) The stock is not insured

Adjusting entry:

Profit & loss      a/c.     Dr.

To loss by fire     a/c.

(Being loss charged to profit and loss account)

Treatment:

1. It will be shown on the credit side of trading account.
2. it will be shown on the debit side of profit & loss account.

 

19.Creation of reserves or funds:

Some times business man decides to create a reserve for a particular expendisuder so that its impact on profit & loss account of each year is uniform. In the initial years the amount of expenditure on repressor is small but as the assets gates older the expenditure is repairs gets higher thane the use of plant and machinery for all years remains the same. Thus in order to keep the impact of repair expenditure uniform a repair reserve is created and each year similar amount is changed from profit and loss account and created to( repair reserve account).

Adjusting entry

1. a) When repair reserve is created.

Adjusting entry

Profit & loss       a/c.      Dr.

To repair reserve     a/c.

(Being creation of repair reserve)

1. b) When actual repairs expenses are paid.

Adjusting entry

Repair            a/c.         Dr.

To bank       a/c.

(Being repair expenses paid)

1. c) When repairs account is transport to repairs reserve account at the end of the year.

Adjusting entry

Repair reserve           a/c.         Dr.

To repairs           a/c.

Treatment:

1. Uniform amount transferrable to repair reserve account is shown on the debit side of profit & loss account.
2. Balance in repairs reserve account is shown on the liabilities side of balance sheet.

3. Commission to manager payable on profits

Sometimes the manager is entitled a commission on profits such commission may be:

1. a) Fixed percentage on net profit before charging such commission.

• ^··Manager’s commission=Profit before commission

1. b) Fixed percentage on net profit after changing such commission.

• ^·· Manager’s commission=Profit before commission

NOTE: Profit before commission=credit side total of profit and loss account (-) Debit side total (excl. manager’s commission) of profit & loss account.

Adjusting Entry;

Manager’s commission          a/c.      Dr.

To outstanding commission     a/c.

(Being commission to manager payable)

Treatment

1. Manager’s commission is shown on the debit side of profit and loss account.
2. Same amount is also shown on liabilities side of balance sheet being outstanding expenditure.