FINAL ACCOUNTS

ADJUSTMENTS

Opening Stock in the trial balance is debited to the trading account.

Closing Stock (generally given as additional information) is credited to the trading a/c. and shown as an asset in the balance sheet.

Purchases / Sales returns are deducted From purchases / sales figures in the trading a/c.

A. The basics:

All expenses incurred for the manufacturing / trading activity are debited to the manufacturing / trading a/c. e.g. wages (of workmen), fuel and power, lighting, rent, rates and taxes, etc. of factory or shop.

Expenses to bring purchased goods to thefactory or shop are debited to the trading a/c. (e.g. carriage inward / freight).

The adjustments: (Assumed accounting year: April to March)

Prepaid expenses: Deduct from the respective expense in the P & L A/c. and show as an asset in the balance sheet.

Illustration:Prepaid Insurance: Insurance premium paid for the year July to June-Rs. 12,000 debited to Insurance account

P & L A/c. Balance Sheet

ExpensesExpenses IncomeIncome

To Insurance 12,000To Insurance 12,000

Less: Prepaid Less: Prepaid 3,0003,000

90009000

LiabilitiesLiabilities AssetsAssets

Prepaid Insurance Prepaid Insurance 3,000 3,000

The adjustments: (Assumed accounting year: April to March)

Outstanding expenses: Add to the respective expense in the P & L A/c. and show as a liability in the balance sheet .

Illustration:Outstanding salary: Salary as per trial balance Rs.5,50,000. March salary payable in April, yet to be accounted for Rs. 50,000.

P & L A/c. Balance Sheet

ExpensesExpenses IncomeIncome

To Salary 5,50,000To Salary 5,50,000

Add: Add:

Outstanding Outstanding 50,00050,000

6,00,0006,00,000

LiabilitiesLiabilities AssetsAssets

OutstandingOutstanding

Salary 50,000Salary 50,000

The adjustments: (Assumed accounting year: April to March)

Pre-received income (Unearned Revenue): (If accounted for as revenue): Deduct from the revenue in the P & L A/c. and show as liability in the balance sheet

Illustration:Advance from customers: Annual revenue Rs. 51,00,000, including Rs. 1,00,000 Advance received from customers accounted for as revenue.

Trading A/c. Balance Sheet

ExpensesExpenses IncomeIncome

Sales 51,00,000Sales 51,00,000

Less: Adv.Less: Adv.

From From Customers Customers 1,00,0001,00,000

50,00,00050,00,000

LiabilitiesLiabilities AssetsAssets

Advance Advance

From From

Customers 1,00,000Customers 1,00,000

The adjustments: (Assumed accounting year: April to March)

Accrued Income: Credit the P & L A/c. with appropriate income a/c. and show income accrued (but not received) as an asset in the balance sheet.

Illustration:Deposit of Rs. 10,000 kept with bank on July 1, @ 12% p. a. for 5 years.

P & L A/c. Balance Sheet

ExpensesExpenses IncomeIncome

By Interest Accrued 900By Interest Accrued 900

LiabilitiesLiabilities AssetsAssets

InterestInterest

Accrued Accrued

On Bank On Bank

Deposit 900Deposit 900

The adjustments: (Assumed accounting year: April to March)

Provision for Doubtful Debts: Debit the P & L A/c. with the provision and show the provision as a deduction from Sundry Debtors in the balance Sheet.

Illustration:Sundry Debtors as per the trial balance Rs. 5,00,000. Create a provision of 5 % for doubtful debts.

P & L A/c. Balance Sheet

ExpensesExpenses IncomeIncome

To Provision for To Provision for Doubtful Debts 25000Doubtful Debts 25000

LiabilitiesLiabilities AssetsAssets

Sundry Debtors 5,00,000Sundry Debtors 5,00,000

Less: Provision Less: Provision

For DoubtfulFor Doubtful

Debts Debts 25,00025,000

4,75,0004,75,000

The adjustments: (Assumed accounting year: April to March)

Provision for Discount on Debtors : This provision is to be made with reference to the debtors after deducting the provision for doubtful debts.

This is because doubtful debtors cannot be expected to become entitled to any cash discount for prompt payment.

Debit the P & L A/c. with the provision and show the provision as a deduction from Sundry Debtors in the balance Sheet , after the deduction of the provision for doubtful debts.

Illustration:Sundry Debtors as per the trial balance Rs. 5,00,000. Provide 5% for doubtful debts and 1 % for discount on debtors.

P & L A/c. Balance Sheet

ExpensesExpenses IncomeIncome

To Provision for To Provision for

Doubtful Doubtful

Debts 25000Debts 25000

To Provision for To Provision for

DiscountDiscount

On Debtors 4,750 On Debtors 4,750

LiabilitiesLiabilities AssetsAssets

Sundry Debtors 5,00,000Sundry Debtors 5,00,000

Less: Provision Less: Provision

For DoubtfulFor Doubtful

Debts Debts 25,00025,000

4,75,0004,75,000

Less: Provision Less: Provision

For DiscountFor Discount

On Debtors On Debtors 47504750

4,70,2504,70,250

Provision for Discount on Debtors (Contd.)

Loss by Fire::Loss of stock by fire is credited to the trading account.

The adjustments: (Assumed accounting year: April to March)

If the stock is fully insured and the full claim is admitted by insurance co. but not received till the date of the balance sheet, it is shown as an asset in the balance sheet. In case claim is for a part of the value of the stock destroyed, in addition to the above disclosures, the irrecoverable portion is written off as “loss by fire” by debiting the profit and loss account.

The adjustments: (Assumed accounting year: April to March)

Depreciation: It means diminution in the utility value of assets due to wear and tear or passage of time.

Illustration:Provide depreciation @ 15% on Plant and machinery of Rs. 10,00,000.

P & L A/c. Balance Sheet

ExpensesExpenses IncomeIncome

To Depreciation 1,50,000To Depreciation 1,50,000

LiabilitiesLiabilities AssetsAssets

Plant & Machinery 10,00,000Plant & Machinery 10,00,000

Less: Depreciation Less: Depreciation 1,50,0001,50,000

8,50,0008,50,000

The adjustments: (Assumed accounting year: April to March)

Goods Distributed as free samples: Sometimes goods are distributed as free samples.This will have to be accounted for in two places.

1.Since the goods are generally distributed as free samples for sales promotion, the amount of such goods will be debited to the P & L A/c. as “Advertisement Expenses A/c.”

2. The amount of such goods will also have to be deducted from “Purchases” to complete the double entry in the trading account.

The adjustments: (Assumed accounting year: April to March)

Trading & P & L A/c.

ExpensesExpenses IncomeIncome

To PurchasesTo Purchases

Less: Goods Less: Goods

distributed distributed

as free as free

samplessamples

To Advertisement To Advertisement

Exps.Exps.

(Goods distributed as (Goods distributed as free samples) free samples)

Goods Distributed as free samples: Contd.