Adjustments of Final accounts - full detail in table form
There are many adjustment because earlier we have not passed any journal entry , so at the time of making final account we have to adjust them . Name
of Adjustment entry
items 1.
Effect on trading and Effect profit and loss loss account
Closing Closing
stock
on
balance
sheet
stock Closing stock will write It will show as asset
account dr. xxx To
in the credit side of in the final account
trading trading account
account xxx 2.
Expenses account Outstanding
outstanding
dr. xxx
expenses or To expenses payable
expenses It will be the current
will add in expenses . if liability so it will go
outstanding it is direct it will go to to the liability side of
exp. xxx
trading account’s debit balance sheet.
or
side , if it is indirect
expenses
nature then it will go to
due but not
the debit side of profit
paid
and loss account
3.
advance Advance
expenses
It
will
deduct
expenses a/c dr. respective xxx To
from It will be the current
expenses asset so it will go to
paid .
assets side of balance
expenses
sheet
account xxx 4.
income Outstanding
receivable
It
will
add
in
the It will show as asset
income
account income and go to credit in the assets side of
dr. xxx
side of profit and loss balance sheet
To
income account
account xxx 5.
income Income
account It will deduct from the It income received
will
shown
as
liability
in
the
side
received
in dr. xxx
advance
To
advance
liabilities
income
account
balance sheet
of
xxx 6 Goods use Drawing account It for personal dr. xxx use
will
deduct
from It will deduct from
purchase in the debit capital
To
purchase side of trading account
account
liabilities
in side
the of
= purchase – drawing in balance sheet goods
=capital- drawing in goods
7. Destroyed loss by fire or It will shown in credit It will not go to of goods
accident account side of trading account Dr. xxx
And also in profit and
To trading
loss account’s debit side
If
there
is
balance sheet
no
insurance It will also go to profit
and
loss
account Profit and loss account dr. xxx To loss by fire / accident 8.
Depreciation
It will go to the debit It will deduct from
Depreciation account dr. xxx To
side of profit and loss fixed asset . Because
respective account
asset
it decrease the value
account
of asset
xxxx
=fixed
asset
-
depreciation 9.
If you have make Net value of provision Deduct from debtor
provisional
any provision for for
doubtful
debt = debtor – new bad
for doubtful doubt ful debts account
transfer
debts
and
the
its
journal profit
entry will passed
for =total
doubtful
debt closing
To
Bad
bad
year
loss provision or closing
account’s debit side
Provision
account dr. xxx
to debts – this
debt
balance
balance of provision + for bad debts or
provision of doubtful
debts debt
account xxx
or
provision
this -
year
opening
( New bad debts balance of provision for which
is
shown
in
not doubtful debts trial
balance
will
transfer
to
provision
for
doubtful
debt
account ) 10.
Commission
Commission account dr. xxx to manager
To
It will shown in the It
will
debit side of profit and liability
outstanding loss
account
as
o/s
shown
as
commission
commission
to
manager If it charge on the amount after charging such commission then we will calculate =
profit
commission
before X
Rate/
100+rate
Trial Balance used in Final Accounting : When Prepared?
The Trial Balance is a statement of ledger account balances as on a particular date (instance). Final Accounting is done towards the end of the accounting period. The trial balance that we consider in the preparation of final accounts is the one that is prepared towards the end of the accounting period i.e. on the last day of the accounting period.
Transactions after the Trial Balance Date
There might be a number of accounting transactions which might not have been taken into consideration by the time the Trial Balance has been prepared. Some of the reasons for the presence of such transactions are
• Transactions which do not occur in the normal course of business
There are a number of transactions relating to the business which do not occur in the normal course of business. These transactions unless deliberately recorded do not get into the books of accounts. Examples for such transactions i.
Stock taken away by the proprietor for personal use
ii.
Abnormal loss of stock
• Transactions which have to be recorded only towards the end
There are a number of transactions relating to the business which have to be recorded only at the end of the accounting period. If the trial balance has been prepared before all such transactions into consideration have been taken into consideration, then they stay unrecorded in the books of accounts. i.
Depreciation on Assets
ii.
Expenses - Outstanding/Prepaid
iii.
Incomes - Outstanding/Pre-received
• Transactions relating to Error Rectifications
The agreement of a Trial Balance is not a conclusive proof of absence of errors in accounting. Even in case where the trial balance agrees, there may still be errors existing in the books of accounts. These errors if identified subsequent to the preparation of the Trial Balance, need to be rectified which needs journal entries to be passed for rectification.
What are Adjustments?
The transactions which have not yet been journalised, appended to the trial balance are what we call adjustments. Thus we can say that Adjustments are transactions relating to the business which have not been journalised by the end of the accounting period. • Illustration Trial Balance of M/s Azaya Traders" as on 30th June 2006.
Particulars
L/F
Debit
Credit
Amount
Amount
(in Rs)
(in Rs)
Opening Stock
–
86,000
Purchases
–
11,36,000
Salaries
–
1,53,000
Wages
–
18,000
Carriage Inwards
–
26,900
Trading Charges
–
64,000
Carriage Outwards
–
52,500
Rent received
–
Cash
–
Capital
–
3,44,700
Bank (Overdraft)
–
37,980
Comission
–
Creditors
–
2,68,000
Sales
–
15,48,700
Debtors
–
2,56,000
Machinery
–
4,80,000
Total
1,78,300 62,500
42,780
23,77,680
23,77,680
» Adjustments
The following additional information is available
1. A Machine purchased on credit from M/s Ramsay Machine Tools for Rs. 2,00,000 is not yet recorded in the books. 2. Wages to the extent of Rs. 43,000 are incorrectly recorded as Salaries. The additional information presented after the trial balance contains information relating to accounting transactions, which are to be identified from the wordings.
Why are they called Adjustments? Why not Additional Transactions?
Since adjustments are also transactions relating to the business, we need to bring them into the accounting books by journalising them. The trial balance is used for final accounting, so as to eliminate a lot of physical work (in manual accounting) in the form of recording transactions for making up final accounts, posting them into respective ledger accounts, balancing of ledger accounts effected by these transactions. Therefore even for the purpose of bringing the transactions represented by the adjustments into books a method has been designed which would not require us to record these transaction, post them and balance the ledger accounts affected. This method incorporates the effect of the transactions into the final accounts without having to go through the regular process of recording, posting, balancing etc. • Accounting for the Transactions
Recording the transactions represented by adjustments normally would result in the existing balance in the affected ledger accounts to either increase or decrease.
» Transaction
Wages to the extent of Rs. 43,000 are incorrectly recorded as Salaries. This represents an error of principle whereby an expenditure that was to be debited in a particular account has been debited to another account. To bring the effect of this transaction into books, the journal entry to rectify this error has to be recorded. » Journal/Ledger Hide/Show • The Method of Adjustment
This method involves identification of the effect and making mathematical adjustments in the figures that we consider in final accounting (i.e. at the time of showing them in the Trading a/c or Profit & Loss a/c or the Balance Sheet.). » Effect of the Transaction
The effect of the journal entry to be recorded in the above case can be analysed as A. (−) From Salaries on the debit side of P/L a/c
The Salaries a/c which already has a debit balance is credited which will result in a decrease in the existing debit balance. To bring the effect of this transaction, the amount involved in the transaction (Rs. 43,000) is deducted from the Salaries a/c balance (Rs. 1,53,000) shown on the debit side of the "Profit & Loss a/c". B. (+) To Wages on the debit side of Trading a/c
The Wages a/c which already has a debit balance is debited resulting in an increase in the existing debit balance. To bring the effect of this transaction, the amount involved in the transaction (Rs. 43,000) is added to the Wages a/c balance (Rs. 18,000) shown on the debit side of the "Trading a/c". These are the adjustments to be made to bring the affect of the above transaction into the books of accounts.
• Why call them Adjustment? Why not Additional Transactions?
Since the affect of these transactions is incorporated by mathematical adjustments, they are called Adjustments rather than just Additional Transactions.
