Adjustment Entries

The following are adjustment entries of journal proper:

Closing stock

Closing stock is valued after the preparation of trial balance. At the time of closing the account of a business, the unsold stock should be valued either at cost or market value whichever is lower.

Outstanding expenses

They are also known as unpaid expenses or outstanding expenses. The expenses incurred but not paid till the end of accounting year must be adjusted while preparing final accounts.

Prepaid expenses

They are also known as unexpired expenses or expenses paid-in-advance. The expenses which have been paid in advance is to be taken into account while preparing final accounts. Otherwise, true picture of profit or loss cannot be ascertained.

Accrued incomes

It is also known as receivable income or income earned but not yet received. Such receivable incomes should be adjusted while preparing final accounts.

Income received in advance

The income of the next year received in the current year is called incomes received-in-advance. Such advance received income which is also called pre-received income should be adjusted while preparing final accounts.

Depreciation of the fixed assets

The fixed assets are acquired by the business for generating revenues. In other word, assets are utilized in revenue generating activities. The decrease in value of the assets because of the use for the business is considered as depreciation. The value of depreciation is to be adjusted while preparing final accounts.

Interest on capital/ Interest on drawing

Interest is charged on the capital contributed by the owners of the business at a given rate. The amount of interest not paid during the period is to be adjusted, while preparing final accounts.

Interest on loan

The borrowing taken from the outside parties is regarded as loan. The interest on loan remained outstanding needs to be adjusted while preparing final accounts.

Goods destroyed by accidents

The value of goods damaged by accident must be adjusted at the time of preparing final accounts. The loss of goods by accident can be adjusted in the following way:

• Goods destroyed by accident but not insured
  Goods destroyed by fire a/c...........Dr.
  To Trading a/c
  (Being goods destroyed by fire.)
  Profit and loss a/c.........Dr.
  To goods destroyed by fire a/c
  (Being loss transferred to profit and loss account.)
  
  
• Goods destroyed by fire recovered fully from insurance company
  Goods destroyed by fire a/c..........Dr.
  To Trading a/c
  (Being loss of goods by fire.)
  Bank a/c.........Dr.
  To goods destroyed by fire a/c
  (Being cash received from insurance company for the goods damaged by fire.)
  
  
• If insurance company has only accepted the claim and the cash not yet recovered
  Insurance Company.........Dr.
  To goods destroyed by fire a/c
  (Being insurance claim admitted for goods damaged by fire.)
  
  
• Goods destroyed by accident but partial amount was recovered from insurance company
  Goods destroyed by fire a/c.......Dr.
  To Trading a/c
  (Being goods destroyed by fire admitted by insurance company.)
  Goods destroyed by fire a/c.......Dr.
  To Trading a/c
  (Being goods destroyed by fire.)
  Bank a/c.......Dr. (amount of claim received)
  Profit and loss a/c.........Dr. (actual loss not covered by compensation)
  To goods destroyed by fire a/c
  (Being cash received from insurance company as compensation partially and the damage not covered by insurance company.)