Correction in Final Accounts

**NOTE **N OTE

**Plea **P lease se Rea Read d the S.N S.NO. O.6,7 6,7 & S.N S.No.1 o.11 1 of the cha chart rt of com common mon adj adjust ustmen mentt

from this pdf. In the main pdf, there is a small mistake in the same S.No. Lesson-10 Final Accounts

Learning Objective • To know how to make various adjustments a djustments in trial balance

Adjustments All the transactions which pertain to the period of final accounts but are not n ot considered while preparing the trial balance are called adjustments. These transactions have been recorded and appear in trial balance but do not pertain to the period of final accounts. Adjustments given outside the trial balance represent entries yet to be made in the  journal and the ledger, with the result that the effects effects of each of the adjustments have to be recorded. Therefore, the effect of nominal account appears in the trading or profit and loss account. At the same time, the effect concerning an asset or liability appears in the balance sheet. In short, all the adjustments given outside the trial balance will appear in both the trading or profit and loss account and the balance sheet. The exception will be in the cases where an adjustment is such that it affects two nominal accounts only and when both the effects of the adjustment will have to be dealt with in the trading and a nd profit and loss account.

Common Adjustments The following chart shows the effects of adjustments in final accounts: S. Adjustment Journal entry Treatment of adjustment in No. for the final accounts (i) To be debited to profit 1. Depreciation Depreciation Account Dr. To Asset Account and loss account. (ii) To be deducted from the value of an asset in the balance sheet. 2. Closing Stock Account Dr. (i) To be credited to tradin stock To Trading Account account. (ii) To be shown on the assets side of the balance sheet.

3.

Bad debts to be written off

Bad Debts Account To Sundry Debtors A/c

Dr.

(i) Amount of bad debts to be debited to profit and loss account. (ii) To be deducted from sundry debtors in the

4.

Reserve for doubtful

Profit and Loss Account To R.D.D.

Dr.

balance sheet. (i) To be debited to profit and loss account.

debts

(ii) To be shown by way of deduction from sundry debtors in the balance sheet.

5.

Outstanding Expenses (Name) Account Dr. (i) Amount to be added to Expenses To Outstanding Creditors for particular item in the trading or profit and Expenses A/c loss accounts. (ii) To be shown on the liabilities side of the balance sheet.

6.

Outstanding Outstanding Income Account Dr. To Income (Name) Account income

7.

8.

9

10.

11. 12. 13.

(i) Amount to be

added from the particular item in the trading or profit and loss accounts. (ii) To be shown on asset side of the balance sheet. Pre-Paid Pre-Paid Expenses A/c Dr. (i) Amount to be expenses deducted from To Expenses (Name) Accounts particular item in the profit and loss accounts. (ii) To be shown on the assets side of the balance sheet. Income Income (Name) Account Dr. (i) To be debited to profit received in To Income Received in and loss account. advance or Advance Account (ii) To be added to capital or accrued To Accrued Income in the balance sheet. Interest on Interest Account Dr. (i) To be debited to profit To Capital Account capital and loss account. (ii) To be added to capital in the balance sheet. Interest on Capital Account Dr. (i) To be credited to profit drawings To Interest on Drawings and loss account. Account (ii) To be deducted from capital in the balance sheet. Net profit Profit & Loss Account Dr. To be added from capital in the balance sheet. To Capital Account Net loss Capital Accou Dr. To be add from capital To Profit & Loss Account in the balance sheet. Goods used Drawings Account Dr. (i) To be deducted from To Purchases Account purchases. by (ii) To be added to proprietor drawings. for personal

use

14

Reserve for Discount on Creditors Account To Profit & Loss Account

Reserve for

discount on creditors

15

Distribution

of goods as free samples

16

Goods lost

fire

Advertisement Account To Purchases Account

by Goods Lost by Fire Account To Trading Account (Total Cost Value) Insurance Claim Account Profit & Loss Account Dr. To Goods Lost by Fire A/c

Dr.

(i)To be credited to profit and loss account. (ii) To be deducted from sundry creditors in the balance sheet.

Dr. (i) To be debited to profit and

loss account as toward advertisement. (ii) To be deducted from purchases in trading account. Dr.

Dr.

(i) Trading account, credit side (full cost value). (ii) Profit and loss   account, debit side, the loss amount/or the amount not recovered through insurance claim. (iii)Balance sheet, asset side, amount of insurance claim if  Received.

Summary 1.All the transactions which pertain to the period of final accounts but are not considered while preparing the trial balance are called adjustments. 2.Adjustments given outside the trial balance represent entries yet to be made in the journal and the ledger. 3.All the adjustments given outside the trial balance will appear in both the trading or profit and loss account and the balance sheet.