Note on Adjustment of Final Account

  • Note
  • Things to remember

Source: www.slideshare.net
Source: www.slideshare.net

Adjustments are unrecorded events or transactions of business organizations. Since, every transaction has two-fold effects according to the principle of double entry system of book keeping, every adjustment, therefore, has two-sided effects in final accounts. The adjustment is shown in either on :

  • Trading account and balance sheet or
  • Trading account and profit and loss account or
  • Profit and Loss account and balance sheet or
  • Assets side and liabilities on balance sheet or
  • Only in balance sheet

Closing Stock

The amount of unused materials and work-in-progress or unsold finished stock at the end of the financial year are called closing stock, it is not included in the trial balance and therefore, is shown outside it. Therefore, it requires adjustment in final account and on the assets side of balance sheet by passing sheet by the following adjustment entry:

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Outstanding Expenses

Expenses, which are incurred but not paid during the same accounting period, are called outstanding expenses. These types of expenses from which services goods have been received but the amount is not paid yet. It must be taken into account in the final account to find out the true profit and loss of the business organization. The outstanding expenses firstly added to the concerned expenses on the debit side of trading account or profit and loss account and then is existed to show on the liability side of the balance sheet.

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Outstanding expense already existing in the trial balances is directly shown on the liability side of the balance sheet.

Accrued Income

Accrued income is also known as outstanding income. It represents income but the amount has not been received yet. It is the income of the same accounting year. It should, therefore, be given effect in the final accounts of the business organization.

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Depreciation

Depreciation is the decline in the value of fixed assets particularly due to their wear and tear. In case if a fixed asset is to be depreciated based on additional information given outside the trial balance, the amount of depreciation of the concerned fixed asset should be shown separately on the debit side of the company's profit and loss account after deducting from the concerned fixed assets on the asset side of the balance sheet by passing the following adjustment entry.

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However, in case of provision for or accumulated depreciation is given in the trial balance and the depreciation of fixed asset is to be provided based on additional information given outside the trial balance, the amount of depreciation of the concerned fixed asset should be shown separately on the debt side of the company's profit and loss account and added to the provision for or accumulated depreciation on the liabilities side of the balance sheet by making the following adjustment entry:

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Appreciation

Appreciation is the automatic and gradual increase in the value of fixed assets. It represents income for the business organization and must be taken into account in the final account of the business organization. Appreciation is shown on credit side of profit and loss account and it is shown on the balance sheet by adding it to the concerned assets.

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Amortization

Amortization is reducing the value of some intangible and fictitious assets such as goodwill, patents, trademark, preliminary expenses, underwriting commission, discount on issue of shares and premium on the redemption of debentures. These assets are reduced every year by some amount till they are fully written-off or amortized. In case an intangible or a fictitious asset is to be written-off based on additional information given outside the trial balance, the amount of amortization from the concerned asset deducted from the concerned asset on the asset side of the balance sheet by passing the following adjustment entry.

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Advance Income

Advance income is also known as unearned income. It is income received in advance. In other words, the amount received in advance before delivering the services is known as advance income. Advance income doesn’t form the part of current years income, therefore, it should be deducted from the concerned income to find out the true net income of the business organization. Advance income is deducted from the income concerned and then it is shown in liability side of the balance sheet under the heading current liabilities. Advance income already appearing on the trial balance sheet is directly shown as liabilities on the balance sheet.

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Prepaid Expenses

Sometimes, expenses are paid-in-advance before they are due or incurred. For example, insurance premium or rent may be paid in advance. Such expenses paid-in-advance are commonly called prepaid expenses. Prepaid expenses are deducted from the concerned expense account on the debit side of either trading or profit and loss account and shown separately on the assets side of the balance sheet by making the following adjustment entry.

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Bad debt and provision for bad debt

When goods are sold on credit, the customer agrees to pay the due amount on the later date. However, some of the customers may not pay their dues in time. The amount, which is uncollectible or can't be recovered from customers (debtors) is bad debt. The amount set aside in advance to meet such losses is called provision for bad debt.

1. Adjustment entry for writing-off further bad debts based on additional information.

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2. Adjustment entry for the provision of bad debt and doubtful debts based on additional information.

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Note: The provision for bad debt and doubtful debts given in trial balance is to be treated as an old provision relating to the previous year and is either shown on the credit side or deducted from the total of bad debts, further bad debt and new provision for bad and doubtful debt on the debit side of the company profit and loss account.

Provision for discount on debtors

Discount is a rebate allowed to the customers. It is offered to the customers or debtors to pay their dues in before stipulated time. When a provision is credited for allowing the discount to debtors, it is called provision for discount on debtors. However, the discount is only provided to those debtors who are expected to pay their debts in time.

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Provision for Discount on Creditor

Provision for discount on creditors is goodwill for the organization for the prompt payment to the creditor. If the payment is made on time or prior to the due then the organization will be benefited with the discount provided by the creditors. If the organization generates regular income from the discount on credits, it is created in the profit and loss account and subtract from the creditors in the balance sheet. Adjustment entry for provision for discount creditors given in additional information.

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References:

Koirala, Madhav et.al., Principles of Accounting -XII, Buddha Prakashan, Kathmandu

Shrestha, Dasharatha et.al., Accountancy -XII, M.K. Prakashan, Kathmandu

Bajracharya, Puskar, Principle of Accounting-XII, Asia Publication Pvt. Ltd., Kathmandu

  1. Adjustment for final account is the process of preparing final accounts that helps to determine the actual amount of income and expenses as well as the historical value of assets. 
  2. The amount of unsued materials and work -in-progress or unsold finished stock at the end of the financial year is called closing stock
  3. Expenses, which are incurred but not paid during the same accounting period, are called outstanding expenses.
  4. Accrued income is also known as outstanding income. It represents income due to but the amount has not been received yet.
  5. Depreciation is the decline in the value of fixed assets particularly due to their wear and tear.
  6. Appreciation is the automatic and gradual decline in the value of fixed assets. 
  7. Amortization is reducing the value of some intangible and fictitious assets such as goodwill, patents, trademark, preliminary expenses, underwriting commission, discount on issue of shares and premium on the redemption of debentures.
  8. The amount received in advance before delivering the services is known as advance income.
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Where does account payable goes?

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Rash narayan chaudhary

supply in hand


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Avash Budhathoki

Please give one example of each . it will much easier for us to understand .Example by posting it into related head


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