Final Accounts

Adjustments

Adjustments

• Items (Additional information) which is yet to be recorded in the books of accounts.

• Arises because of:– To do alteration in the existing items which

appears in Trial Balance.– To add as a new item in the Financial

Statement.

• Determining the amount of revenues and expenses to be reported in a given accounting period.

• For this Matching concepts and Revenue recognition principles is adopted.

• Revenues are recognized in the accounting period in which it is earned.

• Expenses recognized when it is incurred.

• Items appeared in Trial Balance are transferred from Ledger Accounts. (Already recorded in Two Accounts)

• Additional information are to be directly entered in the Financial Statement, so each entry should have two effects or two entry or in two places.

• Some of the Additional information's are:

Closing stock

• It represents the unsold stock at the end of the year.

• Two effects:

• Recorded in Trading Account Credit Side.

• An Assets for the company so show it in Assets side.

Outstanding expenses or Expenses due but not paid

• Expenses relating to a particular period may not have been paid in that accounting period.

• Due for payment in one accounting year but actually paid in future accounting years.

Two Effects

• Outstanding expenses will be Added with concern expenses . Direct Expenses: Trading account’s debit sideIndirect nature – Profit and Loss Account Debit side.

• It will be the current liability so it will go to the liability side of balance sheet.

Advance expenses or Prepaid

• Benefit of some of the expenses spent will be available in the next accounting year also.

• Such a portion of the expense is called pre-paid expense.

• Related to future periods

Two Effects

• It will deduct from respective expenses paid .

• It will be the current asset so it will go to assets side of balance sheet

Income receivable or Outstanding

• There may be certain incomes which have been earned during the year but not yet received till the end of the year.

• It will be added with the income - credit side of Profit and loss account.

• Shown as asset in the assets side of Balance sheet

Income Received In Advance

• Received certain amounts during a particular trading period which are to be earned by them in future periods.

• Such incomes though actually received and therefore, recorded.

Two Effects

• It will deduct from the Income received item.

• Shown as liability in the liabilities side of balance sheet

Goods use for personal use

• It will deduct from purchase in the debit side of trading account = purchase –drawing in goods.

• It will deduct from capital in the liabilities side of balance sheet=capital- drawing in goods

Depreciation

• The value of fixed assets diminishes gradually with their use for business purposes.

• Indirect Expenses - Debit side of Profit and loss account.

• Decrease the value of asset - deduct from fixed asset .

• Fixed asset – depreciation amount.

Interest on Capital

• Interest paid by company to the owners for investment.

• Expense for the business on one hand and income to the proprietor on the other hand.

• Interest on capital - An expense which is debited to Profit and loss account.

• Same amount of interest on capital is added to capital (Liabilities).

Interest on Drawings

• Business charges interest from owners on drawings made by them.

• Interest charged is an Income for the business – Profit and Loss account Credit side.

• Deducted from the capital as it reduces.

Bad Debts

• Debts which cannot be recovered from our Debtors.

• Expenses- shown in the Profit and Loss account debit side.

• Deduct for Sundry Debtors – Asset side.

Provision for Doubtful Debts

• Provision is created for the doubtful amount which liable to receive from Debtors.

Two Effects

• Deduct from Sundry Debtors amount after deducting Bad debts

• Show Under Profit and Loss account debit side

Provision for Discount on Debtors

• Credit sales amount may realized in next accounting year.

• For prompt payment discount is allowed, so provision is created.

• Amount derived after deducting Bad Debts.

Two Effects

• Deduct from the good debtors balance shown on Balance sheet Assets side.

• That is (Sundry Debtors – Bad Debts- Provision for doubtful debts)

• Indirect expenses- Profit and Loss account Debit side.

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