Adjustment Entries

The fnal accounts are prepared on the basis

of information disclosed by the the trial
balance which shows the summary of
balances extracted from diferent ledger
accounts.Some ledger accounts show the
expenses actually paid or income received
during an accounting year but do not show or
disclose the amount actually incurred or
earned during that accounting period .ence
these balances do not re!ect the true value in
relation to the accounting period.These
adjustments help us to calculate the correct
amount of proft and loss and show the true
fnancial position or the state of afairs of a
business enterprise.The entries which are
passed at the end of the accounting year for
incorporating such expenses and incomes are
called adjusting entries.
".#$%S&'( ST%#)*
Stoc+ of unsold goods at the end of year
involves raw materials,semi-fnished,fnished
goods..aluation is done at the cost price or
the mar+et price whichever is less.
#losing Stoc+ A/c 0r.
To Trading A/c
Efect on 1inal A/c*
a.#losing stoc+ will be shown on the credit
side of the trading account.
b.&t will be shown as an asset in the
balance sheet.
2.%utstanding Expenses* Expenses become
due.
Salary a/c 0r.
To outstanding salary a/c
Efect on 1inal A/#*
a.%/S will be shown on the debit side of
trading or 3/$ a/c.
b.%/S will be shown on the liabilities side of
the 4alance Sheet.
5.3repaid6 or unexpired7 Expenses*
3repaid insurance a/c
To insurance a/c
Efect on fnal a/c*
a.0educt it from those particular expenses
on the debit side of 3/$ a/c.
b.3repaid expenses are shown on the
assets side of the balance sheet.
8.Accrued income* 9hich have been
earned or due but not received till the end
of an accounting period.
Accrued income a/c 0r.
To &ncome a/c
Efect on 1inal a/c
a.Accrued income will be shown as an
additional income on the credit side of
the 3/$ a/c.
b.Accrued income ,being debit balance,
will be shown on the assets side of the
balance sheet.
:.&ncome received in advance *Should not
included in the current 3/$ a/c.
&ncome a/c 0r.
To income received in advance a/c
Efect on 1inal A/c
a. &t is to be deducted from income on
the credit side of proft and loss
account.
b. &t will appear on the liability side of
balance sheet.
;.0epreciation*
0epreciation a/c 0r.
To 3lant < machinery a/c
Efect on fnal accounts*
a. 0epreciation will be shown on the
debit side of the 3/$ a/c.
b. &t will be shown on the assets side of
the balance sheetby way of deduction
from that particular fxed assets.
=. 4ad 0ebts*
4ad 0ebts a/c 0r.
To S.debtors a/c
a. &t will be shown on the debit side of 3/$
a/c.
b. &t will be shown on asset side of
balance sheet by way deduction from the
S.debtors.
>.3rovision for bad < doubtful debts*
a. Sundry 0ebtors are ?s.:@@@@ on the 5"
st

0ec2@@: and bad debts on that date are
?s."@@@.3rovision for doubtful debts is to be
created at :A on sundry debtors.
3/$ A/#
0r.
#r.
To provision for
0oubtful debts 28:@
4alance Sheet
$ibilities Assets
S. 0ebtors
8B@@@
$ess* 3rovision
C:A
28:@ 8;::@
b.&llustration* Trial 4alance
as on 5"
st

0ecD2@@:
3articulars 0r.
#r.
Sundry 0ebtors 5@@@@
4ad 0ebts :@@@
Additional information*
".After preparing the trial balance,it is
learnt that a debtor ?ajesh has become
insolvent and so amount of ?s.5@@@ due
from him was irrecoverable.
2.#redit "@A provision for bad and
doubtful debts.
Solution*
3roft < $oss A/#
1or the year ending 5"
st
0ecD2@@:
----------------------------------------------------------------
------------
3articulars Amount
particulars Amt.
To bad debts :@@@
6given in T47
Add* new 40 5@@@
Add* 'ew prov.2=@@ "@=@@
4alace Sheet
As on 5"
st
0ecD2@@:
$iabilities Amt Assets
Amt
S.0ebtors 5@@@@
$ess 'ew 40 5@@@

---------

2=@@@
$ess 'ew
prov. 40 2=@@
285@@
c.&llustration*
Trial 4alance
As on 5"
st
0ecD2@@:
3articulars 0ebit
#redit
S.0ebtors :@@@@
3rov. for doubtful debt
:@@@
4ad debts 5@@@
Additional information*
". Additional bad debts ?s.5@@@.
2. #reate a provision for bad debts
C"@A
%n debtors.
3rofts < $oss Account
As on 5"
st
0ecD2@@:
0r.
#r.
3articulars ?s.
3articulars ?s.
To bad debts
6T47 5@@@
Add* 'ew5@@@
40 ------
;@@@
Add* 'ew 8=@@
3rov.for 40-----
"@=@@
$ess* %ld
3rov. 6407 :@@@ :=@@
4alance Sheet
As on 5"
st

0ecD2@@:
$iabilities Amt Assets
Amt
S.0ebtors
:@@@@
$ess* 'ew
40
5@@@

----------

8=@@@
$ess* 'ew
3rov.
8=@@

-------- 825@@
B.3rovision for 0iscount on 0ebtors*
3roft and $oss a/c 0r.
To provision for discount a/c
Efect on 1inal Accounts*
a.3rov. for discount on debtors
appears Edebit side of the 3/$ a/c.
b.&n 4/S, appears in Assets side and
deducted from S.0ebtors.
&llustration* Trial 4alance
As on 5"
st

0ecD2@@:
3articulars 0r. #r.
S. 0ebtors :@@@@
4ad 0ebts 5@@@
0iscount 2@@@
Additional information*
".#reate a provision for doubtful debts
C"@A on debts.
2.#reate a provision for discount on
debtors C:A on debtors.
5.Additional discount given to debtors
?s."@@@.
3roft < $oss A/c
3articulars Amt 3articulars
Amt
To bad debts
6in T47 5@@@
Add*3rov.
1or 40 8B@@ =B@@
--------
To disct. 2@@@
6in T47
Add* addl.
0isct. "@@@
Add* 3rov
1or 0isct. 22@:
------- :2@:
4alance Sheet
As on 5"
st

0ecD2@@:
$iabilities Amt Assets
Amt
0ebtors
:@@@@
$ess*0isct.
"@@@
$ess*3rov.
1or 40
8B@@

-------

88"@@

---------

$ess*3rov.disct.22@: 8">B:
"@.&nterest on capital*
&nterest on capital a/c 0r.
To capital a/c
Efect on fnal account*
a.&t will appear on the debit side of the
3/$ a/c.
b.Add to the capital a/c in 4/S on liability
side.
"".&nterest on $oan *
&nterest on loan a/c 0r.
To loan a/c
Efect on fnal a/c*
a.0ebit side of 3/$ a/c
b.Add in loan on the liability side of the
4/S.
"2.&ntersest on 0rawing*
0rawings a/c 0r.
To interest on drawing a/c
Efect on fnal a/c*
a.#redit side of 3/$ a/c.
b.Added to the drawings in 3/$ a/c and
deducted from the capital a/c.
"2.#apital expenditure treated as
?evenue*
a.#apital expenditure should be deducted
from the expenses in the proft and loss
or the trading a/c.
b.Added in the concerning asset on the
assets side.
"5. Accidental $osses* $i+e
fre,theft,etc.,such losses are treated as
capital $osses.
&n case of loss of stoc+ due to accident
,treated as revenue loss.
3/$ a/c 0r.
To 1urniture a/c
The loss of stoc+ is shown on the credit
side of the trading account to show the
correct gross proft.
The goods or stoc+ destroyed may be
under 5 considerations*
A. 9hen goods or stoc+ is fully insured*
".$oss of stoc+ by fre a/c 0r.
"@@@@
To trading a/c
"@@@@
2. &nsurance company a/c 0r. "@@@@
To loss of stoc+ by fre a/c
"@@@@
Efect on 1inal Accounts*
a. Trading a/c will be credited with the
fgure of loss of stoc+
b. &nsurance #ompany a/c will be
shown on the assets side of the 4/S.
4. 9hen stoc+ is partly insured*
&f the frm had got ;@A of its stoc+
insured,then the insurance company
would have admitted a claim of
?s.;@@@ against the loss of stoc+ for
?s."@@@@.
". $oss of stoc+ by fre a/c 0r. "@@@@
To trading a/c
"@@@@
2.&nsurance company a/c 0r. ;@@@
3/$ a/c 0r.
8@@@
To loss of stoc+ by fre a/c
"@@@@
Efect on 1inal A/#
a. Trading a/c will be credited with
?s."@@@@ for the loss of stoc+.
b.&nsurance company will be shown as a
debtor for ?s.;@@@ in the balance sheet
on the asset side.
c.3/$ a/c will be debited with ?s.8@@@ as
this loss was not covered by insurance.
#.9hen stoc+ is not insured at all*
". $oss of stoc+ by fre a/c 0r. "@@@@
To trading a/c
"@@@@
2.3/$ a/c 0r. "@@@@
To loss of stoc+ by fre a/c
"@@@@
Efect on fnal accounts*
".Trading a/c will be credited with
?s."@@@@ for loss of stoc+.
2.$oss of stoc+ for ?s. "@@@@ will be shown
on the debit side of the 3/$ a/c.
"8.(oods given away as charity and
samples*
#harity a/c 0r.
Advertisement a/c 0r.
To purchase a/c
Efect on fnal a/c*
".3urchases will be reduced on the debit
side of the trading a/c.
2.Advertisement and charity are expenses
and will be shown on the debit side of the
3/$ a/c.
":.(oods withdrawn for personal use*
0rawings a/c 0r.
To purchase a/c
Efect on 1inal A/#*
".0ebit side of the trading a/c by way of
deduction from purchases.
2.0rawing will be deducted from the
capital a/c on the liabilities side of the
4/S.&f drawing a/c already exists , then this
will be added to that and will be reduced
from capital a/c.
";.(oods used in the business*
&llustration* A sofa set of ?s.":@@@ used by
excellent furnitures for his showroom has
become the business asset and will be
shown on the assets side of the 4/S.
1urniture a/c 0r.
To purchase a/c
Efect on 1inal a/c*
". &t will be deducted from purchase
2. Sofa set will appear on the assets side
of the 4/S.
"=.?eserve 1und* created out of proft*
3/$ a/c 0r.
To reserve fund a/c
Efect on fnal accounts*
".?eserve fund will appear on the debit
side of the 3/$ account alongwith the net
proft.
2.?eserve fund will appeae on the
liabilities side of the 4/S.&f already exists,
then it will added to the previous one.
">. FanagerDs #ommission*
3/$ a/c 0r.
To commission payable a/c
#alculation of commission*
".&f payable at fxed A on net proft before
charging such commission*
A of commission x 'et proft
---------------------------------------------------
"@@
5. &f payable at fxed A on net proft after
charging such commission.
A of commission x 'et proft
"@@ G A of commission
Efect on fnal a/c*
a. #omm.. payable will appear on debit
side of p/$.
b. #omm. 3ayable will appear on the
liability side of 4/S.
"B.0ishonour of 4ills of Exchange*
0ebtorDs a/c 0r.
To 4/? a/c
Efect on fnal a/c*
a. 0ebtorDs total will be increased in
assets side.
b. 4/? a/c will be decreased in assets
side in 4/S.
2@.0eferred ?evenue Expenditure*Some
expenditures are incurred in the initial
year but its beneft is li+ely to be derived
over a number of years.
&llustration* A spends ?s.:@@@@@ in 2@@5
on advertisement to capture the mar+et
and its beneft is expected over the next
: years.This expenditure will be written
of over : years C ?s."@@@@@ per year.
3/$ a/c 0r. "@@@@@
To advertisement a/c
"@@@@@
6 4eing "/: expenditure on advertisement
written of7
Efect on fnal a/c*
3/$ a/c
0r.
#r.
To advertisement
9ritten of "@@@@@
4alance Sheet

------------------------------------------------------------
-------
Assets
Advertisement
:@@@@@
$ess* written of
"@@@@@ 8@@@@@