0ADJUSTMENTS IN FINANCIAL STATEMENTS OR FINAL ACCOUNTS
Information given outside the trial balance are known as adjustments. It means journal entry of this adjustment has not been passed yet . treatment of adjustments will be done keeping in mind the double entry system of book keeping .it means treatment of adjustments is done at least two places in final accounts to complete the double entry system of book keeping.
1 CLOSING STOCK :
Closing stock a/c dr
To trading a/c
TREATMENT :
- It is shown on the credit side of trading a/c
- It is shown on the asset side of balance sheet as a current asset.
# If closing stock is shown in the trial balance it means adjustment for closing stock has already been done and it will be shown as a current asset on the asset side of balance sheet only.
2 OUTSTANDING EXPENSES :
Expenses a/c dr
To outstanding expense a/c
TREATMENT:
- Outstanding expense should be added to the concerned expense on the DR side of trading a/c or P & L a/c.
- It should be shown on the liability side of balance sheet as a current liability.
3 PREPAID EXPENSE :
Prepaid expense a/c dr
To expense a/c
TREATMENT :
- Prepaid expense is deducted from the concerned expense on the DR side of trading a/c or P&L a/c as the case may be.
- It is an asset for the business concern that is why it is shown on the asset side of balance sheet as current asset.
4 ACCRUED INCOME OR OUTSTANDING INCOME:
Accrued income a/c dr
To income a/c
TREATMENT :
- Accrued income is added to the concern item of income on the credit side of the P & L a/c
- It is shown on the asset side of Balance sheet as a debt.
5 UNEARNED INCOME OR UNEXPIRED INCOME OR INCOME RECIVED IN ADVANCE
Income a/c dr
To unearned income
TREATMENT :
- Unexpired income is deducted from the concerned item of income on the CR side of P & L a/c.
- Income received in advance is a liability to the business concern therefore it is shown on the liability side of balance sheet as a current liability.
6 DEPRECIATION
Depreciation a/c dr
To sundry asset
TREATMENT :
- Amount of depreciation is shown on the DR side of P & L a/c .
- It is deducted from the value of asset on the asset side of balance sheet.
# In case fixed asset is purchased during the year depreciation is calculated from the date of purchase to the end of accounting year.
7 INTEREST ON CAPITAL :
Interest on capital a/c dr
To capital a/c
TREATMENT :
- Interest on capital is shown on the DR side of P & L a/c as an expense.
- It is added to the capital on the liability side of balance sheet.
# Interest on capital is always calculated on opening balance of capital for the full year . if additional capital is introduced during the year ,interest on additional capital shall be calculated from the date of introduction of capital till the end of financial year.
8 INTEREST ON DRAWING :
Drawing a/c dr
To interest on drawing a/c
TREATMENT :
- Interest on drawing is income for the business that is why it is shown on the CR side of P & L a/c
- It is deducted from the capital on the liability side of balance sheet.
# if nothing has been mentioned regarding the date of drawing then we will assume that drawing has been made by the proprietor in equal monthly instalment and that too on the 15th of every month .in this case interest will calculated for 6 months.
9 BAD DEBTS :
Bad debts a/c dr
To customer a/c
TREATMENT :
- Amount of bad debts is shown on the DR side of P & L a/c as a loss.
- Amount of bad debts will be deducted from the total debtors on the asset side of balance sheet.
# Bad debts given in the trial balance will not be deducted from debtors in the balance sheet.
10 PROVISION FOR DOUBTFUL DEBTS OR RESERVE FOR DOUBTFUL DEBTS
P & L A/C dr
To provision for doubtful debts
TREATMENT :
- It is shown on the DR side of P & L a/c as a loss.
- It is a liability for the business concern but it is not shown on the liability side of balance sheet . rather it is shown on the asset side of balance sheet by way of deduction from the sundry debtors.
Calculation of amount of provision for doubtful debts
1 amount of new provision required
Total debtors – bad debts given in adjustments
= net debtors * %age given in the adjustments = ****
Add: bad debts given in the adjustments = ****
Add: bad debts given in trial balance = ****
________
****
Less existing provision given in the CR side of trial balance ****
_________
DR side of P & La/c + ****
_________
# if the resulting figure is in –ve it should be shown on the CR side of
P & L a/c
11 PROVISION FOR DISCOUNT ON DEBTORS :
P & L a/c dr
To prov. for discount on debtors &
