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Adjustments of Final Accounts To ensure that the final accounts disclose the true
trading results, it is necessary to take into account the whole of the expenses incurred, whether paid or not, and whole of the losses sustained. Likewise the incomes and gains earned, whether actually received or not, during the period covered by the trading and profit and loss account under consideration must also be recorded. In mercantile system of accounting, it is essential to adjust different accounts before the preparation of final accounts. It is quite common to adjust expenses paid in advance, incomes received in advance, income accrued but not received, bad debts, provision for bad debts depreciation on assets and soon. Journal entries are passed to effect the required adjustments, these entries are known as adjusting entries
Outstanding Expenses Certain expenses relating to a particular period may not
have been paid in that accounting period. All such expenses which are due for payment in one accounting year but actually paid in future accounting years or payment of which is postponed are all outstanding or unpaid expenses. All such expenses must be accounted for in that accounting year in which they are incurred, irrespective of the fact whether they are paid or not. In other words, all paid and also unpaid expenses must be recorded in an accounting year if they relate to that accounting year only with a view to ascertain true trading results e.g. if salaries for the last month are not paid, no entry will appear in books of accounts unless these are paid. So profit and loss account in respect of salaries will thus be under charged than the actual expenditure, therefore the profit will be more.
continue The entry would be Salaries a/c dr... To salary outstanding
a/c The items will fig final statement as follow Profit and loss a/c balance sheet Dr Cr liabilities assets To salaries salaries outstanding +outstanding
Prepaid Expenses The, benefit of some of the expenses already spent will be
available in the next accounting year also, Such a portion of the expense is called pre-paid expense; since such expenses are already paid, they are also recorded in the books of accounts of that period to which they do not relate. The result shown by the final accounts of a particular period will not be correct because such expenses relate to future periods. Therefore, such prepaid expenses must be adjusted in the books of accounts to arrive at true profit. Generally insurance, taxes, telephone subscriptions, rent etc. are paid in advance, thus requiring adjustment e.g. insurance premium of Rs 400 is paid on 1 July and the account are to be closed on 31 march the benefit of the insurance policy will accure up to 30th june next year in other word insurance benefit for three month i.e 1 april to 30th june will be drived in the next accounting year 1/4th of the premium
continue The entry would be Insurance prepaid a/c dr
100 To insurance premium a/c 100 The items will fig final statement as follow Profit and loss a/c balance sheet Dr Cr liabilities assets To insurance pre 400 prepaid insurance 100
Accrued Income There may be certain incomes which have been
earned during the year but not yet received till the end of the year. Income like interest on investments, rent and commission etc. are normally earned by merchant during a particular accounting period but actually not received during that period. Such income items need adjustments before the preparation of final accounts. Such incomes should be credited to that particular income account. At the same time the income so -earned but not received is an asset because the amount is still to be received. Suppose rent for dec Rs 500
continue The entry would be Rent receivable a/c dr... To rent a/c The items will fig final statement as follow Profit and loss a/c
sheet Dr
Cr assets
By rent 500
rent receivable +accrued
balance liabilities
Income Received in Advance Sometimes, traders receive 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 i.e. not yet earned. Such incomes should be credited to the profit and loss account of the year in which these are earned. Therefore, such income though received is not the income but a liability of that period suppose rent received in advance by tenant of Rs 1800 for 2 month and close there a/c before
continue The entry would be
Rent a/c dr 1200 To rent received in advance a/c
1200 The items will fig final statement as follow Profit and loss a/c sheet Dr Cr assets To rent 1800 in adva 1200 -received in advance 1200
balance liabilities rent received
Closing Stock It represents the unsold stock at the end of the
year. Closing stock is valued and following entry is passed at the end of the year: Closing Stock account To Trading Account Closing stock at the end appears in the balance sheet and is carried forward to the next year. At the end of the next year it appears in the trial balance as opening stock and from there it is taken to debit side of trading account and thus closed.
Depreciation The value of fixed assets diminishes
gradually with their use for business purposes. Although this decrease in the value happens every day but its accounting is done only at the end of accounting period with the help of following entry: Depreciation account Dr To Particulars asset
continue The items will fig final statement as follow Profit and loss a/c
balance sheet Dr assets To dep on asset asset cost -Dep
Cr
liabilities
Interest on Capital The proprietor may wish to ascertain his profit
after considering the interest which he losses by investing his money in the firm. Interest to be charged is an expense for the business on one hand and income to the proprietor on the other hand. Following adjusting entry is recorded at the end of accounting period: Interest on capital a/e To Capital a/c Interest on capital being an expense is debited to profit and loss account and same amount of interest on capital is added to capital and come to liability side of balance sheet
Interest on Drawings As business allows interest on capital it also
charges interest on drawings made by the proprietor. Interest so charged is an income for the business on one hand and expense for the proprietor on the other hand. Following adjusting entry is passed at the end. of accounting period: Capital ale Dr. To Interest on drawings a/e The interest on drawings being an income is credited to profit and loss account is shown as a deduction from the capital. In liability side of b/s
trading results, it is necessary to take into account the whole of the expenses incurred, whether paid or not, and whole of the losses sustained. Likewise the incomes and gains earned, whether actually received or not, during the period covered by the trading and profit and loss account under consideration must also be recorded. In mercantile system of accounting, it is essential to adjust different accounts before the preparation of final accounts. It is quite common to adjust expenses paid in advance, incomes received in advance, income accrued but not received, bad debts, provision for bad debts depreciation on assets and soon. Journal entries are passed to effect the required adjustments, these entries are known as adjusting entries
Outstanding Expenses Certain expenses relating to a particular period may not
have been paid in that accounting period. All such expenses which are due for payment in one accounting year but actually paid in future accounting years or payment of which is postponed are all outstanding or unpaid expenses. All such expenses must be accounted for in that accounting year in which they are incurred, irrespective of the fact whether they are paid or not. In other words, all paid and also unpaid expenses must be recorded in an accounting year if they relate to that accounting year only with a view to ascertain true trading results e.g. if salaries for the last month are not paid, no entry will appear in books of accounts unless these are paid. So profit and loss account in respect of salaries will thus be under charged than the actual expenditure, therefore the profit will be more.
continue The entry would be Salaries a/c dr... To salary outstanding
a/c The items will fig final statement as follow Profit and loss a/c balance sheet Dr Cr liabilities assets To salaries salaries outstanding +outstanding
Prepaid Expenses The, benefit of some of the expenses already spent will be
available in the next accounting year also, Such a portion of the expense is called pre-paid expense; since such expenses are already paid, they are also recorded in the books of accounts of that period to which they do not relate. The result shown by the final accounts of a particular period will not be correct because such expenses relate to future periods. Therefore, such prepaid expenses must be adjusted in the books of accounts to arrive at true profit. Generally insurance, taxes, telephone subscriptions, rent etc. are paid in advance, thus requiring adjustment e.g. insurance premium of Rs 400 is paid on 1 July and the account are to be closed on 31 march the benefit of the insurance policy will accure up to 30th june next year in other word insurance benefit for three month i.e 1 april to 30th june will be drived in the next accounting year 1/4th of the premium
continue The entry would be Insurance prepaid a/c dr
100 To insurance premium a/c 100 The items will fig final statement as follow Profit and loss a/c balance sheet Dr Cr liabilities assets To insurance pre 400 prepaid insurance 100
Accrued Income There may be certain incomes which have been
earned during the year but not yet received till the end of the year. Income like interest on investments, rent and commission etc. are normally earned by merchant during a particular accounting period but actually not received during that period. Such income items need adjustments before the preparation of final accounts. Such incomes should be credited to that particular income account. At the same time the income so -earned but not received is an asset because the amount is still to be received. Suppose rent for dec Rs 500
continue The entry would be Rent receivable a/c dr... To rent a/c The items will fig final statement as follow Profit and loss a/c
sheet Dr
Cr assets
By rent 500
rent receivable +accrued
balance liabilities
Income Received in Advance Sometimes, traders receive 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 i.e. not yet earned. Such incomes should be credited to the profit and loss account of the year in which these are earned. Therefore, such income though received is not the income but a liability of that period suppose rent received in advance by tenant of Rs 1800 for 2 month and close there a/c before
continue The entry would be
Rent a/c dr 1200 To rent received in advance a/c
1200 The items will fig final statement as follow Profit and loss a/c sheet Dr Cr assets To rent 1800 in adva 1200 -received in advance 1200
balance liabilities rent received
Closing Stock It represents the unsold stock at the end of the
year. Closing stock is valued and following entry is passed at the end of the year: Closing Stock account To Trading Account Closing stock at the end appears in the balance sheet and is carried forward to the next year. At the end of the next year it appears in the trial balance as opening stock and from there it is taken to debit side of trading account and thus closed.
Depreciation The value of fixed assets diminishes
gradually with their use for business purposes. Although this decrease in the value happens every day but its accounting is done only at the end of accounting period with the help of following entry: Depreciation account Dr To Particulars asset
continue The items will fig final statement as follow Profit and loss a/c
balance sheet Dr assets To dep on asset asset cost -Dep
Cr
liabilities
Interest on Capital The proprietor may wish to ascertain his profit
after considering the interest which he losses by investing his money in the firm. Interest to be charged is an expense for the business on one hand and income to the proprietor on the other hand. Following adjusting entry is recorded at the end of accounting period: Interest on capital a/e To Capital a/c Interest on capital being an expense is debited to profit and loss account and same amount of interest on capital is added to capital and come to liability side of balance sheet
Interest on Drawings As business allows interest on capital it also
charges interest on drawings made by the proprietor. Interest so charged is an income for the business on one hand and expense for the proprietor on the other hand. Following adjusting entry is passed at the end. of accounting period: Capital ale Dr. To Interest on drawings a/e The interest on drawings being an income is credited to profit and loss account is shown as a deduction from the capital. In liability side of b/s
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