USA: +1-585-535-1023

UK: +44-208-133-5697

AUS: +61-280-07-5697

Adjustments in Financial Accounting

The ultimate aim of the Trading and Profit and Loss Account is to know the real Profit or Loss of the concern during a given period. The purpose of the Balance sheet is to know the financial position at a given period. True profit can be arrived at after adjusting all pending bills and outstanding expenses and incomes through entries. These entries which are passed at the end of the accounting period are called adjustment entries. The following important adjustments which are to be made at the end of the year are as follows.

 

Important Adjustments

1. Closing stock

2. Outstanding expenses

3. Prepaid or unexpired expenses

4. Income earned but not received or Accrued income

5. Income received in advance

6. Depreciation

7. Interest on capital

8. Interest on drawings

9. Interest on loan

10. Bad debts

11. Provision for bad and doubtful debts

12. · Provision for discount on debtors

13. Provision for discount on creditors

14. Goods distributed as free of sample

15. Loss of stock by fire

 

In the actual sense all the above adjustments are given outside the Trial Balance. While preparing the Final accounts all the adjustments are to be considered. Normally all the adjustments will appear at two places in the final accounts i.e., either

(i) Trading Account and Balance Sheet or 

(ii) Profit & Loss Account and Balance Sheet 

Adjustment and their Treatment

1. Closing Stock

Trading Account                                 –           Credit side

Balance Sheet                                     –           Asset side.

 

2. Outstanding Expenses

Trading or Profit & Loss Ale              –           Debit side

Balance Sheet                                     –           Liability side

 

3. Prepaid Expenses

Profit & Loss Account                        –           Credit side

(subtract from respective expenses)

Balance Sheet                                     –           Asset side

 

4. Income Due but not Received

Profit & Loss Account                        –           Credit side

(Add with respective incomes)

Balance Sheet                                                 –           Asset side

 

5. Income Received in Advance

Profit and Loss Account                     –           Credit side

(Subtract from respective incomes)

Balance sheet                                      –           Liability side

 

6. Depreciation

Profit and Loss Account                     –           Debit side

Balance Sheet                                     –           Liability side

(Subtract from respective Assets)

 

 

7. Interest on Capital

Profit and Loss                                   –            Account Debit side

Balance Sheet                                     –             liability side (Add the capital)

 

8. Interest on Drawings

Profit and Loss Account                     –           Credit side

Balance sheet                                      –           Liability side (Add the capital

 

9. Interest on Loan

Profit and Loss Account                    –             Debit side

Balance Sheet                                     –             Liability side

(Add with the respective loan)

 

10. Bad Debts

Profit and Loss Account                     –              Debit side

Balance Sheet                                     –              Asset side

(Subtract from the sundry debtors)

 

11. Provision for Bad and Doubtful Debts

Regarding the Bad debts and provision for Bad and doubtful debts we have to apply the following formula.

 

BD + NR- OR

 

BD : It refers to the bad debts. It should be given either Trial Balance or Adjustments or both. The value of bad debts is transferred to formula for calculation. The calculated value should be transferred either to debit side or credit side of the P.L & A/c.

Bad Debts (Adjustment)

Treatment: 

(i) BIS Asset side [Subtract from Debtors], (ii) Transfer to formula [P.L & A/c) NR : It refers to New Reserve. Normally it should be give in the adjustment, in the name of provision for doubtful debts or reserves on debtors and so on.

Treatment: 

(i) Transfer to formula, (ii) Balance Sheet : Asset side (Subtract from the Debtors)

OR : It represents old reserve. Normally, bad debts provision i.e., old reserve is given in the Trial Balance. The treatment is that it should be transferred to the formula for calculating new bad debts provision.

After finding the value, to apply the formula it should be transferred to P.L & Ale either debit side or credit side.

12. Provision for Discount on Debtors

– Profit & Loss Accounts Debit Side

– Balance Sheet Asset side [Deduct from sundry debtors]

 

13. Provision for Discount on Creditors

– Profit & Loss Accounts Credit Side

– Balance Sheet Liability side [Deduct from sundry creditors]

 

14. Goods Distributed as free of samples

– Trading Accounts Debit Side [Deduct Purchases]

– Profit & Loss Accounts Debit Side (treated as advertisement expenditure).

 

15. Loss of Stock by fire 

(a) If Insurance Company admitted the full claim

Trading Account credit side (Total stock value destroyed by fire)

Balance Sheet Asset side (Insurance Company Accounts)

 

(b) If Insurance Company admitted the part of the claim : (for example 60%)

Trading Account credit side (Total stock value Destroyed by fire) (100%)

Profit and Loss Account Debit side (Loss by fire) (40%)

Balance Sheet Asset side (Insurance Company Account) (60%)

 

16. Managers Commission

In an organisation earn higher amount of profit it may give at certain percentage of commission on the net profit to their manager. It may calculate as follows:

Problem 6. The following figures are available relating to the business of Shri Vel for

the year 2002.

                                                                                                                $

Opening stock ·                                                            25,000

Purchases                                                                     92,000

Direct expenses                                                             4, 000

Closing stock                                                               29, 600

Sales                                                                          1,38,000 

Calculate (i) Cost of goods sold and (ii) Gross Profit. 

Solution:

(i) Cost of goods sold = Opening stock + Purchases + Direct Expen – Closing Stock

= $ 25,000+92,000+4,000-29,600    = $ 91,400

 

(ii) Gross Profit = Sales – Cost of goods sold

= 1,38,000 – 91,400

$ 46,600

 

Problem 7. Prepare Trading Account from the following Balances :

 

 Opening stock …………….. .. …… ….. .. …….. ……………… .. …………….. …………. 80,000

Purchases ………………………………………………………….. …………………………….. 3,00,000

Sales … …… .. … …… …….. ….. ……………………. ….. ………. ….. ………….. .. …… 4,50,000

Purchase Returns .. ………. ……………………. … ……………………………………… …… 10,000

Sales Returns ………….. ……………………………………………………………….. ….. ….. .. 20,000

Wages ………………. ………….. …………… ………………………………………… ……………… 5,000

Carriage Freight …………………. ….. …… …. ……………………………… …………….. 15,000

Freight on purchases …………………………………………………….. …………… ….. ….. 12,000

 Solution:  

       Trading Account

Problem 8. From the following balances extracted at the close of trading period ended on 31.3.2003, prepare profit and Loss Account as on that date. 

Gross profit                                                               90,000

Carriage outward                                                  5,000

Salaries                                                                      11,000

Rent Taxes                                                            4,000

Fire insurance premium                                  3,000

Bad debts                                                                2,500

Discount Dr                                                             1,000

Apprentice Premium (cr)                                3,000

Advertisement                                                     1,000

Travelling expenses                                           750

Sundry Trade expenses                                     500

Solution:

Profit and Loss Account

Problem 9. From the following Trial balances of Mr. Ragunath for the year ending on 31.12.2003, prepare Final Accounts with the closing stock of $ 15,000.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Solution : Trading Account for the year ended 31.12.2003

Profit and Loss Account for the year ended 31.12.2003

Balance Sheet as on 31.12.2003

Problem 10. From the following Trial Balance of Mr.X, prepare the final accounts for the year ended on 31.12.1996

The following adjustments are to be made :

a)      Closing stock $ 60,000

b)      Outstanding wages $ 2,000 and Rent $ 3,000

c)      Depreciate land and buildings at 5%, Machinery at 10%, office equipment and furniture by 10%

d)      Provide Reserve at 21 I 2% on debtors.

e)      Insurance prepaid $ 200

f)       Calculate interest on capital at 5%. [MBA Nov. 1997, Madras] 

Solution:                                 Trading Account of Mr. X for the year ended 31.12.1996

Profit and Loss Account of Mr. X for the year ended 31.12.1996

Balance Sheet of Mr. X as on 31.12.1996

Problem 11. The following balances are drawn from the books of M Is Aruind Mills as on 31.12.1997.

Account                                                                                                                       Amount

$

Land …………………. ….. .. …………….. …. ……………………………. …………………………. 1,00,000

Building ……………… ……………………………… .. ……….. …………… ………………………. 2,00,000

Sales ……………………………………… ……. ……… …………………. ………… .. …………….. 3,00,000

Purchases …………………. …. ……………………………………. ………… …….. ……………… 1, 75,000

Sales returns …………………. … ………………. ………………….. …………………………………. 10,000

Purchase returns … ………………………………. ………………………………………………………. 5,000

Stock (1.1.97) ………………. …………….. …… ….. ………………….. …. ……………………….. 25,000

Debtors ….. …………….. …… ………………. ………. …. …… …………………….. ….. …… ….. 50,000

Bank overdraft …………….. ……………………………….. …. ………………… ………………….. 15,200

Cash on hand ………………………………………………. ………………………………………………. 5,000

Creditors……………………………………………………………………………….. …………………… 20,000

Salaries …………………………………………………………………………………………………..………. 10,000

Wages………………. ………….. ….. ……………….. ………… ….. …… ………… ……. …….. …. 12,000

Goodwill ………….. ………………………… …………………….. ….. ………. … .. .. …… ……….. 15,000

General Expenses ……. .. … …………………….. ………………………… …. ………. …….. …. … 5,000 

Selling expenses…………………………. ….. ……….. ……………………………………………….. 12,000

Bad debts…………………………………. ….. ………….. ……………………… …………. …. ………. 1,000

Insurance …………………………………………………… ………………………………………………… 1,200

Capital ………………………………. ……………………………………………………………………. 2,81,000 

The following adjustments are to be made :

a)      Closing stock is $ 30,000.

b)      Provide depreciation at the rate of 10% on buildings.

c)      Write off further bad debts $ 1,000.

d)      Salaries yet to be paid $ 3,000.

e)      Insurance prepaid $. 300

You are required to prepare a Trading and Profit and loss account and balance sheet of M/s Arvind Mills. 

Solution: 

Trading Account of M/s. Arvind Mills for the year ended 31.12.1997

Profit and Loss Account of M/s. Arvind Mills for the year ended 31.12.1997

Balance Sheet of M/s. Arvind Mills as on 31.12.1997

Problem 12. From the following Trial Balance, prepare the Trading and Profit and Loss Account of Mr. Kumaran for the year ended December 31, 1993 and the Balance Sheet as on that date.

The following adjustments are to be made :

        i.            Stock on December 31, 1993 $. 5,200

      ii.            3 months factory lighting and heating is due but not paid $. 30/-

    iii.            5% depreciation to be written off on furniture

     iv.            Write off further bad debts $ 70.

v.            The provision for doubtful debts is to be increased to Rs.300 and provision for discount on debtors be provided at 2%.

Solution :                    Trading Account of Mr. Kumaran for the year ended 31.12.1993

Profit and Loss Account of Mr. Kumaran for the year ended 31.12.1993

Balance Sheet of Mr. Kumaran as on 31.12.1993

Problem 18. From the following Balance of Mr. Raju for the year ended on 31.3.2003, prepare Final Account.

                                                                      $

Capital ……………. ……………………………………………….. …………………………………… 1,00,000

Drawings ………………………………………………….. ………………………………………… .. … 18,000

Buildings ……………………………………………………………………………………………………. 15,000

Furniture & fittings ………………………………………………….. – ………………………………. 7,500

Motor Van …………………. …. ………. ……………………………. …. ….. ……………. ……… 25,000

Loan from Hari @ 12% interest.. ……………………………………………………………….. 15,000

Interest paid on above …. …………… : ………………………………………………… …………… 900

Sales ……………………………………………………………………………………………………. 1,00,000

Purchases …………………………………………………… : ………………………………………. 75,000

Opening stock ……… ………………… ……………… ………………. .. ………………………… 25,00

Establishment expenses ……………………….. : ……………………………………………… 15,000

Wages ……………… · ……….. .’ …………………………… …………. ………. ……………….. 2,000

Insurance …………………… : ………………………………………………………………………. 1,000

Con1-n2ission Received .. ………………………………………………………………………… 4,500

Sundry Debtors …………………………………………………………………………………….. 28,100

Banh Balance …………………. :: …………….. : ……………………………………………… 20,000

Sundry Creditors ……………………………. : …………………………………………………. 10,000

Interest (Cr) ……. ………………………………………. .. ………………………………………. 3,000

 

The following adjustments are· to be made :

 

(a) The value of closing stock on 31.03.2003 was $. 32,000.

(b) Outstanding wages $ 500.

(c) Prepaid Insurance $ 300.

(d) Commission Received on advance $ 300.

(e) Allow interest on capital @ 10%.

(/) Depreciate Building 21h %, Furniture’s fittings 10%, Motor van 10%.

(g) Charge interest on Drawings $ 500. .. .

(h) Accrued Interest $ 500 I-.

Solution:

 Trading Account of Mr. Raju for the year ended 31.12.2003

Profit and Loss Account of Mr. Raju for the year ended 31.12.2003

Balance Sheet of Mr. Raju as on 31.12.2003

NOTE:

 

Capital                                   1, 00,000

(+) Interest on Capital                     10,000

                                           1, 10,000

 

(-) Drawings                                        18000

(+) Interest on Drawings                                 500

                                                18500

 

                                            18500

                                            91500

(+) Net Profit                               6575

                                            98075

 

Problem 19. From the following balance, prepare Final Account of Mr. Kumar for the )’ear ended on 31.12.1997.

                                                               $                            $

Capital Account                                                                      60000

Plant & Machinery                                         18000            

Depreciation on Plant & Machinery                        2000

Repair to Plant                                                                        1600

Wages                                                                                      28000

Salaries                                                                                   4000

Income Tax                                                                             500

Cash in hand                                                                           2000

Furniture                                                                                             24500

Depreciation on Motor car                                                                 2500

Purchase Less returns (Adjusted)                                                       93500

Sales                                                                                                                                        249000

Bank Overdraft                                                                                                                       13800

Accrued Income                                                                                  1500

Salaries outstanding                                                                                                                2000

Bills Receivable                                                                                   30000

Bills Payable                                                                                                                           3000

Provisions for Bad debts                                                                                                         6000

Bad debts                                                                                            1000

Discount on Purchases                                                                                                           4000

Sundry Debtors                                                                                   35000

Sundry Creditors                                                                                                                     23300

Stock on Hand 01.01.1997                                                                  37000

Motor Car                                                                                           50000

Stock on 31.12.1997                                                                            30000                                     

                                                                                                            361100              361100

 

Write off $ 3,000 as bad debts and maintain a provision for bad debts at 5% Sundry

Debtors.

Solution:

Trading Account of Mr. Kumar for the year ended 31.12.1997

Profit and Loss Account of Mr. Kumar for the year ended 31.12.1997

Balance Sheet as on 31.12.2003