Adjustments in Final Accounts

Subject: Accountancy

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Sunway Business School

Overview

The transactions, which do not appear in the trial balance, are to be noted as adjustments. The adjustment transactions represent such items of incomes and expenditures, which relate to the current year and have not yet been brought into the book of accounts. This note has information about adjustments in final accounts.
Adjustments in Final Accounts

The adjustment helps to determine the actual net profit and financial position of the business.

Every adjustment has a dual effect. The possible effects are as follows: -

  • Trading account and balance sheet or
  • Profit and loss account and balance sheet or
  • Trading account and profit and loss account.

The followings are some of the significant adjustment transactions and their effects on final accounts: -

S.No.

Transactions

Effect on final accounts

Treatment in final accounts

1.

Closing Stock

Trading Account

Balance Sheet

Credit

Assets

2.

Outstanding Expenses

Trading Account or Profit and Loss Account


Balance Sheet

Debit (Add to the concerned item)

Liabilities

3.

Accrued Incomes

Profit and Loss Account

Balance Sheet

Credit (Add to the concerned item)

Assets

4.

Prepaid Expenses

Trading Account or Profit and Loss Account

Balance Sheet

Debit (Deduct from the concerned item)

Assets

5.

Advance Incomes

Profit and Loss Account

Balance Sheet

Credit (Deduct from the concerned item)

Liabilities

6.

Depreciation/ Amortization

Profit and Loss Account

Balance Sheet

Debit

Assets (Deduct from the asset)

7.

Bad Debts and Provision for Bad Debts

Profit and Loss Account

Balance Sheet

Debit

Assets (Deduct from debtor)

8.

Interest on Capital

Profit and Loss Account

Balance Sheet

Debit

Liabilities (Add to the capital)

9.

Interest on Loan

Profit and Loss Account

Balance Sheet

Debit

Liabilities

  1. Closing Stock:
    As the value of closing inventories is ascertained at the end of the accounting year, it appears as an adjustment. It should be credited to trading a/c and shown in assets side of B/S.

  2. Outstanding Expenses:
    These are the expenses incurred within the accounting year but the payment has not been made. Outstanding expenses should be added to the concerned expenses in in profit and loss a/c and will be shown as current liability in the B/S.

  3. Accrued Incomes:
    It is the income that has already been earned but the money has not been received. So, it is credited to P&L a/c and being accounts receivable, shown as an asset in the B/S.

  4. Prepaid Expenses:
    Prepaid Expenses
    Prepaid Expenses

    These are the expenses which ahve been paid but a part of the amount paid extends to the next year. Advance amount paid shouldbe deducted from the concerned expenses and be shown as a Current Asset in the B/S.

  5. Advance Incomes:
    These are incomes received during the current year, but part of the amount received relates to the next year. Such amount must be deducted from the total amount received in P&L a/c and shown on the liabilities side of the B/S as it represents an amount, which the business is obliged to return

  6. Depreciation/ Amortization:
    Depreciation means diminution or fall in value of an asset due to its constant use. It is first shown on the debit side of the P&L a/c and then deducted from the original value of asset in the B/S.
  7. Bad Debts and Provision for Bad Debts:
    It is deducted from debtors on assets side of the balance sheet shown in debit side of the P&L a/c.

  8. Interest on Capital:
    Interest
    Interest on Capital
    The interest so charged is a loss to the business and gain to the proprietor. So it is debited to the Profit and Loss a/c and added to the capital in the Balance Sheet.

  9. Interest on Loan:
    It is credited to the Profit and Loss a/c and deducted from the capital in the Balance Sheet.
Things to remember
  • The transactions, which do not appear in the trial balance, are to be noted as adjustments.
  • The adjustment transactions represent such items of incomes and expenditures, which relate to the current year and have not yet been brought into the book of accounts. 
  • The adjustment helps to determine the actual net profit and financial position of the business.
  • The unsold items of goods remained in the store at the end of the accounting year is called closing stock. 
  • Accrued incomes are those incomes that are earned but not yet received. 
  • The incomes, which are not earned but received in advance, are called advance incomes.
  • The amount of interest, which is allowed on capital, is known as interest on capital. It is an expense. 
  • It includes every relationship which established among the people.
  • There can be more than one community in a society. Community smaller than society.
  • It is a network of social relationships which cannot see or touched.
  • common interests and common objectives are not necessary for society.
Questions and Answers

The entries, which are passed for those transactions, which are not included in the trial balance are called adjustment entries.

Accrued incomes are those incomes that are earned but not yet received. They are the assets of the business.

Prepaid expenses are those expenses that are paid in advance. They are assets of the business.

The incomes, which are not earned but received in advance, are called advance incomes. They are the liabilities of the business.

The permanent decrease in the value of fixed assets due to continuous use is called depreciation. It is the loss of the business.

The uncollectible or irrecoverable amount of debtors is known as bad debts.

The amount of provision, which is created for uncollectible debtors, is called provision for bad and doubtful debts.

The amount of interest, which is allowed on capital, is known as interest on capital. It is an expense.

The uncollectible or irrecoverable amount of debtors is known as bad debts. The amount of provision, which is created for uncollectible debtors, is called provision for bad and doubtful debts. These are losses of the business. It is deducted from debtors on the assets side of the balance sheet and shown on the debit side of the profit or loss account.

Prepaid expenses are those expenses that are paid in advance. They are assets of the business. These are shown on the assets side of the balance sheet and deducted from the concerned item on the debit side of the trading or profit and loss account.

The incomes, which are not earned but received in advance, are called advance incomes. They are the liabilities of the business. These are shown on the liabilities side of the balance sheet and deducted from the concerned item on the credit side of the profit or loss account.

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