Financial Statements with Adjustments Entries and their Accounting Treatment
Financial Statements with Adjustments Entries and their Accounting Treatment

In order to prepare a true and fair financial statement, there are some very important adjustments that have to be done before preparing the accounts. The following are some Adjustments Entries and their Accounting Treatment:

1. CLOSING STOCK
Unsold stock at the end of Financial year called Closing stock and valued at “Cost or market value whichever is less”

FIRST TREATMENT
Where an opening and closing stock adjusted through a purchase account and the value of Closing Stock given in Trial Balance-

Closing stock will be shown as adjusted purchase account on the debit side of Trading account and will appear in the Balance Sheet under current Assets.

2. OUTSTANDING EXPENSES
Expenses which are due or not paid are known as outstanding expenses.

ACCOUNTING TREATMENT
Outstanding expenses will be added in Profit & Loss account in particular expense account and will also appear in liabilities side of the Balance Sheet under the current liabilities.

3. PREPAID EXPENSES
Expenses that are paid in advance are known as Prepaid Expenses.

ACCOUNTING TREATMENT
Prepaid Expenses will be deducted from the particular expenses as appear in Trading & Profit & Loss account and will be shown in the Balance Sheet under the current assets.

4. ACCRUED INCOME
Accrued income is the income which is earned during the year, but not yet received at the end of the Financial Year.

ACCOUNTING TREATMENT
Accrued income will be added to a particular income under the Profit & Loss account and will be shown in the Balance Sheet as current assets.

5. INCOME RECEIVED IN ADVANCE
An income received in advance, but not earned. Example: advance rent, etc.

ACCOUNTING TREATMENT
An income to be reduced by the amount of advance income in profit & loss account and will appear as current liabilities in the Balance Sheet.

6. INTEREST ON CAPITAL
Where an interest is paid on the capital introduced by the proprietor or partner of the firm.

ACCOUNTING TREATMENT
Debit Side of Profit & Loss account

Add to capital account (Credit side of Capital account).

7. INTEREST ON DRAWING
Where an interest is to be paid on any drawings for person use by the proprietor or partner of the firm.

ACCOUNTING TREATMENT
Credit Side of Profit & Loss account

Reduced from capital account (Debit side of Drawing account).

8. PROVISION FOR DOUBTFUL DEBTS
Provision for doubtful debts will be made if there is any doubt on the recovery from Sundry Debtors.

ACCOUNTING TREATMENT
Debit Side of Profit & Loss Account

In a Balance Sheet, provision for the Doubtful will be deducted from the Sundry Debtors’ Account.

9. PROVISION FOR DISCOUNT ON DEBTORS
If there is any offer of discount to pay the debtors if they can pay their debts within certain period.

ACCOUNTING TREATMENT
Debit Side of Profit & Loss Account

In a Balance Sheet, provision for the Discount on Debtors will be deducted from the Sundry Debtors Account.

10. BAD DEBTS
Bad debts means unrecovered debts or irrecoverable debts. This may arise as a result of death of a debtor, disappearance, etc.

ACCOUNTING TREATMENT
Debit Side of Profit & Loss Account

In a Balance Sheet, Sundry debtors will be shown after deducting the Bad Debts.

11. RESERVE FOR DISCOUNT ON CREDITORS
If there is any chance to get discount on the payment of sundry creditors within certain period.

ACCOUNTING TREATMENT
Credit Side of Profit & Loss Account

In a Balance Sheet, Sundry Creditors will be shown after deducting the Reserve for Discount.

12. LOSS OF STOCK BY FIRE
There may be three conditions in this case

ACCOUNTING TREATMENT
1. If Stock is fully insured
  • Credit Side of Trading Account
  • Assets side of Balance Sheet (With full value of loss)

2. If Stock is partially insured
  • Credit side of Trading Account (With Total value of Loss)
  • Debit side of Profit & Loss a/c (With value of loss unrecoverable)
  • Asset Side of Balance Sheet (With value recoverable)

3. If Stock is not insured
  • Credit Side of Trading Account
  • Debit side of Profit & Loss Account

13. RESERVE FUND

ACCOUNTING TREATMENT
  • Debit side of Profit & Loss Account
  • Liabilities side of Balance Sheet

14. FREE SAMPLE TO CUSTOMERS

ACCOUNTING TREATMENT
  • Credit side of Trading Account
  • Debit Side of Profit & Loss Account

15. MANAGERIAL COMMISSION

ACCOUNTING TREATMENT
  • Debit side of Profit & Loss Account
  • Liabilities side of Balance Sheet as commission payable

16. GOODS ON SALE OR APPROVAL BASIS

If there is any un-approved stock lying with the customers at the end of financial year.

ACCOUNTING TREATMENT
  • Sales Account Dr
  • To Debtors A/c (With Sale Price)
  • Stock Account Dr
  • To Trading Account (with cost price)

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