Department of Technical Education

Andhra Pradesh
Name : N.sambaiah
Designation : Head of Section
Branch : DCCP
Instititute : Suvr & SR Govt.Polytechnic
for Women,Ethamukkala.

Year : I year
Subject : Accountancy –I
Subject code : CCP-102
Topic : Final Accounts
Duration : 50 minutes
Sub-topic :Journal entries required for
preparation of Trading and Profit
and Loss account
Teaching a aids : PPT’S

ccp-102-136 1
Objectives of the lesson

 On completion of the period, you would be able to

 Able to understand adjustments in Final accounts

ccp-102-136 2
Recap

 In previous classes, you learnt trading a/c,

P and L a/c, and the closing journal entries

ccp-102-136 3
Adjustments in Final accounts

 The main object of final accounts is to find out exact Net

profit / Loss and true financial position of the firm
 To get correct net profit / loss, all expenses incurred and
incomes earned in the year whether actually paid or to
be paid or received (or to be received) are brought into
account
 certain expenses relating to the trading period may be
due but not paid. similarly, certain expenses are paid in
advance but not due.

ccp-102-136 4
Adjustments in final accounts.. contd..

 There are some incomes earned during the trading period but not
received. Sometimes, incomes are received in advance but not
earned in the trading period.
 Certain debts may become irrecoverable, which are to be written
off. And provision is to be made for bad and doubtful debts.
 Depreciation is to be made on fixed assets.
 The above are some of the cases, among many, which require
adjustments.
 Before preparing final accounts, the adjustments are to be made
to find out exact net profit/loss. journal entries required for
making adjustments are called adjustment entries.

ccp-102-136 5
Common items that require adjustments

1.Outstanding expenses 8. Interest on drawings

2.Prepaid expenses
3.Income earned but not
received
4.Income received in
advance
5.Depreciation of assets
6.Appreciation of assets
7.Interest on capital
9. Writing of bad debts
10.Reserve for doubtful
debts
11.Closing stock
12.Interest on Loan

ccp-102-136 6
Adjustments— Outstanding expenses

 These expenses belong to the accounting period but not

paid during this period. These are called Outstanding
expenses. This is adjusted by passing the following entry.
Particular expense account Dr xxxx
To Outstanding expenses account xxxx
(Being outstanding expenses taken into account)
-------------------------------------------------------------------------------
 By passing this entry:
a) amount due is added to that expense account on the
debit side of Trading account or Profit and Loss account.

b) Outstanding expenses account, which shows credit

balance, is shown on liability side of Balance Sheet.
ccp-102-136 7
Adjustments - Outstanding expenses.
Contd..

 Eg, profit and loss account is prepared on 31-12-07.

Salaries for of December, 07 are due on 31-12-07 but
not paid on or before 31-12-07. then, salaries are due
but not paid. Salaries due are Rs.5000.
 Adjusting entry :
Salaries account Dr 5000
To Outstanding expenses account 5000
(Being salaries for December 07 due)
---------------------------------------------------------------------------

ccp-102-136 8
Adjustments - Outstanding expenses.
Contd..
 In the Profit and Loss account, it is shown as:

Profit and Loss account

Dr Cr

To Salaries 10000
Add: outstanding 5000
-------- 15000

ccp-102-136 9
Adjustments - Outstanding expenses.
Contd..
 In the Balance Sheet, it is shown as below.
Balance sheet

Liabilities Assets

Outstanding expenses
Salaries 5,000

ccp-102-136 10
Adjustments – 2.Prepaid expenses

 Expenses paid in advance but not due during the accounting

period.
 These expenses belong to next accounting year.
 Some of such expenses are – Insurance, Telephone bills etc
These expenses should not be taken into account during
the accounting year. Adjustment entry
Prepaid expenses account Dr. Xxxx
To Particular expense account xxxx
(Being the adjustment entry for prepaid expenses)
-------------------------------------------------------------------

ccp-102-136 11
Adjustments – 2.Prepaid expenses ..(contd).

 By this, 1. Prepaid expenses account is opened, with debit balance

The same is shown on the Assets side of the Balance Sheet
 2. The sum of prepaid expenses is reduced in the given
expenses account in the Trading account or Profit and Loss
account.
 For Example – a sum of Rs. 4000 is paid as INSURANCE, out of
which Rs.1000 is prepaid insurance.
 Adjustment entry
Prepaid Expenses account Dr 1000
To Insurance account 1000
(Being adjustment for prepaid insurance)
------------------------------------------------------

ccp-102-136 12
Adjustments – 2.Prepaid expenses ..(contd)
In the Profit and Loss account, it is shown as
Profit and loss account

Dr Cr

To Insurance 4000
Less:prepaid 1000
-------- 3000

ccp-102-136 13
Adjustments – 2.Prepaid expenses ..(contd)
In the Balance Sheet, it is shown as
Balance Sheet as on…..

Liabilities Assets

Prepaid expenses
Insurance 1000

ccp-102-136 14
Adjustments –3. Income earned but not
received
 Also called outstanding income.
 This income is earned during the accounting year but not entered
into accounts due to non-receipt of amount
 This income belongs to the accounting year and hence it credited
to Profit and Loss account.
 Adjustment entry :
Income earned but not received account Dr xxx
To Name of the income account xxx
(Being adjustment entry for the income earned but not
received)
-------------------------------------------------------------------------------

ccp-102-136 15
Adjustments – 3.Income earned but not
received.. (contd)

 By passing this entry

1. Income earned account is added with the amount of not
received, on the credit side of Profit and Loss account.
2. Income earned but not received account shows debit
balance and it is shown on the Assets side of the Balance Sheet.
 For example, Interest earned but not received during the year is
Rs.2000. The following adjustment entry is required for this.

Income earned but not received account Dr 2000

To Interest account 2000
( Being adjustment entry for income earned but not received)

ccp-102-136 16
Adjustments – 3.Income earned but not
received.. (contd)
In the Profit and Loss account, it is shown as
Profit and loss account
Dr Cr

By Interest 4000
Add: earned
but not received 2000 6000

ccp-102-136 17
Adjustments – 3. Income earned but not
received.. (contd)
In the Balance Sheet, it is shown as
Balance Sheet as on

Liabilities Assets

Income earned but not

received:
Interest 2000

ccp-102-136 18
Adjustments –4. Income received in advance

 Sometimes, traders receives some income in advance for which

the services will be done at the next accounting year, not in the
accounting year
 This income current does not belong to current accounting year.
 The income received in advance is deducted from total income to
get the true income of current year
 Adjustment entry
Name of the income account Dr xxxx
To Income received in advance account xxxx
(Being the adjustment for the income received in advance)
-----------------------------------------------------------------------------

ccp-102-136 19
Adjustments –4. Income received in
advance.. (contd)

The effect of the above entry:

1. In profit and loss account, the advance amount is deducted
from the nominal income account.
2. Income received in advance account shows credit balance
and hence it is shown on the liabilities side of the Balance
Sheet.
For example: a sum of Rs. 500 received as advance Rent.
Adjustment entry is:
Rent received account Dr xx
To Income received in advance xx
(Being adjustment for income received in

advance)
--------------------------------------------------------
ccp-102-136 20
Adjustments –4. Income received in
advance.. contd
In the Profit and Loss account, it is shown as
Profit and loss account

Dr Cr

BY Rent received 4000

Less: received in
advance 500
------ 3,500

ccp-102-136 21
Adjustments –4. Income received in
advance.. contd
In the Balance Sheet, it is shown as
Balance Sheet as on

Liabilities assets

Income received in
advance
Rent 500

ccp-102-136 22
Summary

 Before finalizing final accounts some adjustments are to be

incorporated to get exact profit / loss
 In this class we have discussed some of the adjustments and
they are:
1.Outstanding expenses
2. Prepaid expenses
3.Income earned but not received
4.Income received advance
 In the next class, we will discuss some more adjustments
required in final accounts

ccp-102-136 23
Quiz

1. Express incurred in current year but not paid are :

a) prepaid exp
b) outstanding exp
c) preliminary exp
d) None of the above

ccp-102-136 24
Quiz

2. Insurance premium paid in advance not belong to

current year is :
a) Income accrued
b) Outstanding exp
c) Prepaid exp
d) None of the above

ccp-102-136 25
Assignment
Pass adjusting entries for the following
a) Wages due but not paid Rs10,000
b) Insurance premium (for next accounting year) paid
in current year Rs 2,000
c) Rent received in advance Rs 6,000

ccp-102-136 26