UNIT

ADJUSTMENTS IN FINAL
ACCOUNTS

Structure
18.0
18.1

18.2
18.3
18.4
18.5
18.6
18.7
18.8
18.9
18.10
18.11
18.12
18.13
18.14
18.15
18.16
18.17
18.18

18.19

Objectives
Introduction
Need for Adjustments
Closing Stock
Outstanding Expenses
Outstanding Incomes
Prepaid Expenses
Income Received in Advance
Depreciation
Interest on Capital
Interest on Drawings
Bad Debts
Provision for Bad Debts
Provision for Discount on Debtors
Provision for Discount on Creditors
Let Us Sum Up
Key Words
Some Useful Books
Answers to Check Your Progress
Tcr~ninalQucslions/Excrciscs

18.0 OBJECTIVES
After studying this unit you should be able to:
explain why adjustment entries are necessary at the time of preparing the final
accounts
list the items in respect of which adjustments are usually made
pass adjustment entries.

18.1 INTRODUCTION
You have learnt about the preparation of final accounts (Trading and Profit and Loss
Account and the Balance Sheet) without any adjustments. Before preparing the final
accounts, it is necessary to find out whether the books of account contain a complete
record of all transactions relating to the year for which they are being prepared. In
practice, generally, the accounts d o not contain all items of expenses and incomes
which relate to the current year. They may, on the other hand, contain certain items
which relate to the next year. Therefore, while preparing the final accounts it becomes
necessary to make certain adjustments in respect of some items of expense3 and
incomes. In this unit you will learn (i) which are the items that need adjustment, (ii)
how such adjustments are made in the books of account, and (iii) how final accounts
are prepared with various adjustments.

18.2 NEED FOR ADJUSTMENTS

While preparing the final accounts it is necessary to ensure that all items of incomes
and expenses relating to the current year are fully accounted for. In practice there are
a number of items which are still to be brought into the books of account. Suppose a
concern closes its books in December. The wages of its workers for the month of

Final Accounts-11

December have not yet.been paid. They are payable in January next ye&. It means
the Wages Account does not include the wages for the month of December. Such
unpaid wages have to be brought into account and shown in the Trading Account
along with wages already paid. Take another example. The insurance premium had
been paid in July for twelve months ending June 30. It means that a portion of the
insurance premium (amount relating to the period from January to June) has been
paid in advance. Such prepaid portion of the insurance must be adjusted while
debiting insurance to the Profit and Loss Account for the year. Similarly, alterations
in accounts have to be made in respect of incomes which have been earned during the
current year but not received, and also the incomes which have been received in
advance. The alterations thus made in various items are called 'adjustments'. The
purpose of making various adjustments is to ensure that the final accounts reveal the
true profit or loss and the true financial position of the business. The items which
usually need adjustment are:
1 Closing Stock
2 Outstanding Exptnses
3 Outstanding or Accrued Incomes
4 Prepaid Expenses
5 Incomes Received in Advance or Unearned Incomes
6 Depreciation
7 Interest on Capital
8 Interest on ~ i a w i n ~ s
9 Bad Debts
10 Provision for Bad Debts
11 Provision for Discount on Debtors
12 Provision for Discount on Creditors
Let

US

now discuss these adjustments one by one.

18.3 CLOSING STOCK

You learnt in Unit 14 that all the goods purchased during the year are not completely
sold out by the end of that year. Some goods may remain unsold known as closi'ng
stock. You also learnt that usually closing stock is not given in the Trial Balance. It is
mentioned as an adjustment item. So, while preparing the final accounts it is first
credited to the Trading Account and then shown as an asset in the Balance Sheet.

Adjusted Purchases :When the closing stock is given in the Trial Balance, it would
mean that both the opening and closing.stocks have been adjusted in the purchases. In
such a situation, opening stock is not shown in the Trial Balance. The Trial Balance
will show only the figures of adjusted purchases and the closing stock. Now you must
know how to deal with these items in the final accounts. The adjusted purchases are in
fact the cost of goods sold. It is worked out by adding the opening stock to purchases
and deducting the closing stock therefrom. Hence adjusted purchases are shown on
the debit side of the Trading Account. In this case, there is no need to show the
closing stock on the credit side of the Trading Account as it has already been
adjusted in purchases. It will be shown only on the asset side of the Balance Sheet.

18.4 OUTSTANDING EXPENSES

Outstanding expenses are those expenses which have become due in the currknt year
but remain unpaid till the end of the year. They are also known as 'expenses accrued'
or 'expenses due but not yet paid'. Example of such expenses are salaries payable,
wages payable, interest dueson loans, etc. Since they remained unpaid by the end of
the accounting year, no entry might have been passed in the books of account. So,
they must be taken into account while preparing the Trading and Profit and Loss

Account otherwise it will not reveal the correct amount of profit or loss. The
followingjournal entry is passed for adjustment of outstanding expenses.
Concerned Expenses Account
To OutstanQingExpenses Account
(Being outstanding expenses brought into account)

Adjustments in Final Accounts

Dr.

The effect of this entry will be: (i) the concerned expenses account will now show an
increased amount, and (ii) a new account called 'Outstanding Expense Account' will
be opened in the books. Thus, the Trading and Profit and Loss Account will be
debited with the increased amount of expense and the 'Outstanding Expense Account'
will be shown as a liability in the Balance Sheet. Look at lllustration 1 and
study how an item of outstanding expense is treated at the time of preparing the final
accounts.

lllustration 1
A businessman, on balancing his books on December 31, 1986, found that the wages
amounting to Rs. 3,000 for the month of December have not been paid. The wages
paid in the year amounted to Rs. 33,000. Thus, the Trial Balance shows Rs. 33,000 as
the debit balance of Wages Account and Rs. 3,000 as outstanding wages under
'Adjustments'. Pass the necessary adjusting entry and show how the concerned ledger
accounts would appear after the adjustment has been made. Also show how
outstanding wages will appear in the final accounts.
Solution:
1 The following adjusting entry is passed for bringing into account the outstanding
wages for the month of December, 1986.
JOURNAL
1986
Dec.31

WagesA/c
To Outstanding Wages A/c
(Being the outstanding wages for the month of
December, 1986 brought'into account)

Dr.

Rs.
3,(-"lo

Rs.
3,000

2 After making the above adjusting entry the concerned ledger accounts will appear
as follows:
Wages Account
Dr.
1986
Dec. 3 1
" 31

Cr.
Rs. 1986
33.000 Dec. 31

To Balance b/d
To Outstanding
Wages A / c

By Trading A / c
(Transfer)

Rs.
36,m

3,000
36,000

36,000

Outstanding Wages Account

1986
Dec. 31

Rs. 1986
3,000 Dec. 31

To Balance c/d

1987
Jan. 1

By Wages A/ c

Rs.
3,000

By Balance b/ d

3,000

3 The item 'Outstanding Wages' will be shown in the final accounts as follows:
i) Debit side of the Trading Account as addition to the Wages already paid.
Trading Account
for the year ended December 31,1986
Dr.

Cr.
Rs.

To Wages
Add Outstanding

33,000
3O
,w

36,000

ii) Liabilities side of Balance Sheet as a separate item under the head 'Current
Liabilities'.
Balance Sheet
as on December 31, 1986
Rs.
Current Liabilities:
Outstanding Wages

18.5

3,000

OUTSTANDING INCOMES

Outstanding incomes are those incomes which have bee,n earned during the current
year but have not been received till the end of the year. They are also called 'incomes
accrued' or 'incomes earned but not yet received'. Examples of such incomes are rent
receivable, commission receivable, interest receivable, etc. As in the case of
outstanding expenses, the outstanding incomes will not appear in the books because
they havemot been received. In order to ascertain the true profit or loss, such incomes
must be taken into account while preparing the Profit and Loss Account. The
following journal entry will be passed for the adjustment of outstanding incomes.
Outstanding Income Account
Dr.
To Concerned Income Account
(Being outstanding income brought into account)
The effect of this entry will be: (i) the concerned income account will now show an
increased amount, and (ii) a new account called 'Outstanding Income Acsount' will be
opened in the books. Thus, the Profit and Loss Account will be credited with the
increased amount of income and the outstanding income will be shown as an asset in
the Balance Sheet. Look at 1llDstration 2 and study how an item of outstanding
income is treated at the time of preparing the final accounts.
Illustration 2
A businessman has let a part of his business premises on a monthly rent of Rs. 500.
Rent for the month of December, 1986 has not been received. He closes his books
annually on December 31. Pass the necessary adjusting entry and shbw how the
concerned ledger accounts would appear after the adjustment has been made. Also
show how the outstanding rent will appear in the final accounts.
Solution:
1 The following adjustment entry is required for bringing into account the
outstanding rent for the month of December, 1986.
JOI'RN AL

1986
Dec. 31 Outstanding Rent A/c
To Rent A/c
(Being the outstanding rent for the month of
December brought into account)

2 After making ;the above adjusting entry the concerned ledger accounts will appear
as follows:
Rent Account

Dr.

Cr.
To Profit and Loss A/c
(Transfer)

Rs. 1986
Dec. 31
6,000 *' 31

Rs.
By Balance bid
By Outstanding Rent A/c

5,500
500

Outstandi'ng Rent Account

Adjustments in Final Accounts

3 The item 'Outstanding Rent' will appear in the final accounts as follows:
i) Credit side of the Profit and Loss Account as addition to the rent already
received.
Proflt and Loss Account
for the year ended December 31,1986
Dr.

Cr.

Rs.
5.500

ii) Assets side of the Balance Sheet as a separate item under the head 'Current
Assets'.
Balance Sheet
as on December 31,1986

Rs.
CurrenlAssets:
Outstanding Rent

500

18.6 PREPAID EXPENSES

Sometimes, the benefit of some expenses will be available not only in the current year
but also for the next year. That portion of an expense the benefit of which is yet to be
received, is called prepaid expense. It is also called 'unexpired expense7.Examples of
such expenses are unexpired insurance premium, rent paid in advance, taxes paid in
advance, etc. In such situations, it is necessary to find out the portion of the expense
which relates to the next year and deduct the same from the total amount of that
expense before it is charged to the Profit and Loss Account. The adjustment for a
prepaid expense is made with the following journal entry.
Prepaid Expense Account
Dr.
To Concerned Expense Account
(Being the adjustment of prepaid expense)
The effect of this entry will be: (i) the concernec expense account will now show a
reduced balance, and (ii) a new account called 'Prepaid Expense Account'will be
opened in the books. Thus, the Profit and Loss Account will be debited with the
reduced amount of expense and the Prepaid Erpense Account will be shown a* an
asset in the Balance Sheet. Look at Illustration 3 and study how an item of prepaid
expense is treated at the time of preparing the final accounts.
Illustration 3
On September 1, 1986 a sum of Rs. 1,200 was paid as premium towards a fire
insurance policy for twelve months ending August 31, 1987. The books of the business
are closed annually on December 31. Make necessary adjustment and show how the
concerned ledger accounts would appear after the adjustment. Also show how the
prepaid insurance will appear in the fina; a~counts.
Solution:
1 The insurance premium amounting to Rs. 1,200 was paid for twelve months fropl
September 1, 1986. Since the books are closed on December 31, 1986, the premium

Final Accounts-I1

for four months from September 1, 1986 to December 31, 1986 amounting to
Rs. 400 (41 12 of Rs. 1,200) relates to the current year. The balance of Rs. 800
relating to eight months from January 1, 1987 to August 31, 1987 shall be treated
as insurance paid in advance. The adjustment for the prepaid insurance will be
made by means of the following Journal entry:

JOURNAL
1986
Dec. 31

Prepaid Insurance A / c
To lnsurance A / c
(Being the adjustment of insurance premium paid
in advance)

Dr.

2 After making the above adjustment the concerned ledger accounts will appear as
follows.

Dr.
1986
Sept. I

Insurance Account

1,200 Dec. 31

Cr.
Rs.
By Prepaid
Insurance A / c
By Profit and Loss A / c
(Transfer)

Repaid Insurance Account

1986
Dec. 31

To Insurance A / c

1987
Jan. I

To Balance bld

:;1E:31/

r8i1I

ByBalancec/d

3 The item 'prepaid insurance' will appear in the final accounts as follows:
i) Debit side of Profit and Loss Account as deduction from the total premium
paid.
Profit md Loas Account
for the yeru ended December 31,1986

Dr.

Cr.
Rs.

To Insurance
Less Prepaid

1,200
800

400

ii) Assets side o f the Balance Sheet as a separate item under the head 'Current
Assets'.
Balance Sheet
as on December 31,1986

Current Assets:
Prepaid lnsurance

18.7 INCOME RECEIVED IN ADVANCE

Sometimes, certain income is received during the current year but the service in
respect thereof has not yet been provided in full by the firm. The portion of income in
respect of which the service is yet to be provided is known as 'income received in

advance'. It is also called 'unearned income'. Examples of such incomes are rent
received in advance, interest receivdd in advance, etc. In such a situation, it is
necessary to take into account only such portion of income in respect of which the
'service has been rendered during the current year. The unearned portion of such
income should be adjusted before preparing the final accounts. This is done by
passing the following journal entry:
Concerned Income Account
Dr.
To Income Received in Advance Account
(Being the adjustment of income received in advance)

Adjustments in Final Accounts

The effect of this entry will be: (ij the concerned income account will now show a
reduced balance, and (ii) a new account called 'Income Received in Advance Account'
will be opened in the books. Thus, the Profit and Loss Account will be credited with
the reduced income, and the I n c m e Received in Advance Account will appear as a
liability-in the Balance Sheet. Look at Illustration 4 and study how an item of income
received in advance is treated at the time of preparing the final accounts.

Illustration 4
A firm-received Rs. 1,200 from an apprentice as premium for six months from August
1, 1986 to January 31, 1987. Pass the adjusting entry and-show the necessary ledger
accounts, assuming that the books are closed on December 31. Also show how the
item 'apprentice premium received in advance' will appear in the final accounts.
Solution:
1 The apprentice premium amounting to Rs. 1,200 has been received for six months
from August 1, 1986 to January 31, 1987. Since the books are closed on December
31, 1986, the premium for five months from August 1, 1986 to December 3 1, 1986
.
amounting to Rs. 1,000 (516 of Rs. 1,200) relates to the aurrent year and the
balance of Rs. 200 relating to the month of January, 1987 shall be treated as
apprentice premium received in advance. The following journal entry is passed for
adjusting the unearned apprentice premium.
JOURNAL
1986

Dec. 31

Apprentice Premium A/c

Dr.
To Apprentice Premium Received in Advance A / c
(Being the a$justment of one month apprentice premium
received in advance)

Rs.
200

Rs.
200

2 After making the above adjusting entry the concerned ledger accounts will appear
as follows:

Apprentice Premium Account

Dr.
Dec. 3 1

Cr.

Rs.

1986

To Apprentice Premium
Received in
Advance A/ c
To Profit and Loss A/c
(Transfer)

200

1,000
1,200

Apprentice Premium Received in Advance Account

-

1986

Dec. 31

1986

To Balance c/d

Dec. 31

Rs.
By Apprentice
Premium A / c

1987

Jan. 1

By Balance b/d

200

Final Accounts-I1

3 The item 'apprentice premium received in advance' will appear in the final accounts
as follows:
i) Credit side o f Profit and Loss Account as deduction from the total premium:
Profit and Loss Account
for the year ended December 31,1986
Dr.
By Apprentice Premium
Less Received in Advance

Rs.
1,200
200

Rs.
1,000

ii) Liabilities side of Balance Sheet as a separate item under the head 'Current
Liabilities.'
Balance Sheet
as on December 31,1986
Rs.
Current Liabilities:
Apprentice Premium
Received in Advance

200

Check Your Progress-A

1 What is an outstanding expense? Explain with an

2 What do you mean by prepaid expense? Give an example.

.....................................................................................................................

.......................................................................................................................

3 What do you mean by outstanding incomes?

4 What do you understand by incomes received in advance?

5 Choose one of the following alternatives and tick ( v ) the correct answer.
a) Outstanding Salaries are shown in the Balance Sheet as
i) a long-term liability
(
ii) an asset
(
iii) a current liability
(

1
1
1

b) While making an adjustment entry in respect of closing stock, we debit

i) Closing Stock Account
(
ii) Trading Account
(
iii) Purchases Account
(
c) In case the cldsing stock appears in Trial Balance, it is shown in the
i) Trading Account
(
ii) Manufacturing Account
(
iii) Balance Sheet
(

Adjustments in Final Accounts

1
1
1
)

1
1

d) While making an adjustment entry for prepaid expenses, we

debit prepaid insurance and credit
i) Profit and Loss Account
ii) Insurance Account
iii) Trading Account
e) Incomes received in advance are shown in Balance Sheet as
i) a current liability
ii) a current asset
iii) a fictitious asset

18.8 DEPRECIATION

'
,

The term 'depreciation' means decrease in the value of a fixed asset resulting from
normal wear and tear and the passage of time. You know that the fixed assets such as
machinery, building, etc., are used for the purpose of earning revenue. Therefore, the
fall in their value should be considered as an expense or loss incurred in realising such
revenue. It must be charged to the Profit and Loss Account. The fixed assets will also
be shown in the Balance Sheet at reduced values otherwise the Balance Sheet will fail
to disclose the correct financial position. Depreciation is brought into account by
means of the following journal entry:
Depreciation Account
Dr.
To Concerned Asset Account
(Being depreciation on fixed assets)
The effect of the above adjustment entry will be: (i) the value of the concerned asset is
reduced, and (ii) a new account called 'Depreciation Account' is opened in the books.
The depreciation @ charged to the Profit and Loss Account as a separate item of
expense and shown in the Balance Sheet by way of deduction from the value of the
concerned fixed asset.
Depreciation is generally calculated at the given rate for the period for which the asset
has been used in the accounting year. Thus, if an asset is purchased during the year
the depreciation should be calculated from the date of acquisition till the end of the ,
year. If the date on which the additions were made is not given, you should calculate
depreciation on additions for the full year. In the case of old assets, depreciation is
calculated on the opening balance. Look at Illustration 5 and study how depreciation
. is treated at the time of preparing the final accounts.
Illustration 5
The following are the balances of assets as on January 1, 1986.
Rs.
Plant and Machinery
80,000
Furniture
12,000

A new machine costing Rs. 20,000 was acquired on October 1, 1986. Depreciation is
to be provided on Plant and Machinery at 10% and on Furniture at 5% per annum.
Pass the necessary adjustment entries and show the ledger accounts. Also show how
depreciation will appear in the final accounts. The books are closed on December 31
each year.
Solution:
1. Depreciation on Furniture at 5% on Rs. 12,000 amounts to Rs. 600. In the case of
Plant and Machinery, depreciation should be provided on the opening

Final Accounts-11.

balance of Rs. 80,000 for the whole year and on Rs. 20,000 (cost of the new
machine) for three months i.:., from October 1 to December 31, 1986.
Rs.
8,000
500

Depreciation at 10% on Rs. 80,000 for one months

Depreciation at 10% on Rs. 20.000 for three years
Total
T h e following is the adjustment entry for depreciation:

JOURNAL
1986
Dec. 3 1

Depreciation A / c
To Plant and Machinery A / c
To Furniture Alc
(Being depreciation written off on Plant
and Machinery and Furniture)

Dr.

Rs.
9,100

Rs.
8,500
600

2 After making the above adjustment entry, the concerned ledger accounts will
appear as follows:
Plant and Machinery Account
Cr.

Dr.
1986
Jan. I
Oct. I

I987
Jan. 1

Rs. 1986
80,000 Dec. 3 1
20,000 " 31

To Balance b / d
I o Bank A'c

By Depreciation A / c
By Balance c / d

Rs.
8,500
91,500
1 ,oo,ooo

1 ,oo,ooo
91,500

To Balance b/ d

Furniture Account
1986
Jan. I

To Balance b/d
.

Rs 1986
12,000 Dec 31
"
31
-

By Depreciation A / c
By Balance cld

12,000

12,000
1987
Jan. I

Rs.
600
11,400

11,400

To Balance b:d

Depreciation Account
i986
Dec. 3 1

RS.

7 o Plant and
Mach~neryAlc
To Furniture A / c

8,500
600

1986
Dec 31

RS.

By Profit and Loss A/c

(Transfer)

9,100

9,100
9,100

3 Depreciation will appear in the final accounts as follows:

i) Debit side o f the Profit and Loss Account as a separate item of expense
Profit and Loss Account
lor the year ended December 31,1986
Dr.

Cr

Rs.
To Depreciation on :.
Plant and Machinery
Furniture

8,500
600

9,100

ii) Assets side o f the Balance Sheet : as deduction from the concerned asset.

Adjustments in Final Accounts

Balance Sheet
as oi ~ecember31,1986
Rs.
Fixed Assets:
Furniture
Less Depreciation at 5%
Plant and Machinery
Add Addition
Less Depreciation at 10%

12,000
600

1 1,400

80,000
20,000
1,00,000
8,500

91,500

18.9 INTEREST ON CAPITAL

You have learnt that the funds provided by the proprietor of the business constitute
capital. Sometimes, the proprietor may like to know the profits made by the business
after taking into consideration interest on his capital. The purpose is to find out the
real profits of the business after deducting the interest on capital which the proprietor
could have earned even otherwise by investing the amount elsewhere. Hence, interest
is allowed at a certain rate on the capital. Such interest is treated as an expense to the
business. The following adjustment entry is passed to bring interest on capital into the
books of account.
Interest on Capital Account
Dr.
To Capital Account
(Being interest allowed on capital)
Interest on capital is treated in the final accounts as follows:
i) On the debit side Profit and Loss Account as a separate item of expenses.
ii) On the liabilities side o f the Balance Sheet as addition to capital.
Interest on capital should be calculated on the opening balance of Capital Account
i.e., the balance at the beginning of the year. If any additional capital is introduced
during the year, interest on the additional capital should be calculated from the date
on which it was brought into the business.

18.10 INTEREST ON DRAWINGS

Drawings refer to the amounts withdrawn by the proprietor from the business for
personal use. In case interest is allowed to the proprietor on his capital, it is usual
practice to also charge interest on drawings. Interest on drawings is a gain to the
business. The following adjustment entry is passed for interest on drawings:
Capital Account or Drawings Account
Dr.
To Interest on Drawings Account
(Being interest charged on drawings)
Interest on Drawings will be treated in the final accounts as follows:
i) On the credit side o f Profit and Loss Account as a separate item of income.
ii) On the liabilities side o f the Balance Sheet as deductions from capital.
I

Interest on drawings should be calculated at a given rate from the date of withdrawal
till the end of the year. In case the relevant information regarding the date of
withdrawals were not given, the interest should be charged for six months assuming
that the amounts were drawn evenly throughout the year.

Final Accounts-I1

"

Illustration 6 '
Capital on January 1, 1986 was Rs. 50,000. On October 1, 1986 proprietor introduced
a further capital amounting to Rs. 6,000. His drawings during the year amounted to
Rs. 3,000. Interest at 5% is to be allowed on capital and charged on drawings. Pass the
necessary journal entries and show how these items will appear in the final accounts.

Solution:
1 ~alculation'ofInterest
On Capital :
On Rs. 50,000 at 5% for one year
On Rs. -6,000at 5% for three months

Rs.
2,500
75

Total

2,575

On Drawings : As the dates of withdrawals are not given in the problem, interest on
drawings should be calculated for six months assuming that the amounts were
withdrawn evenly throughout the year. Thus, interest on Rs. 3,000 at 5% for six
months is Rs. 75.

2 The journal entries for interest on capital and interest on drawings will be as
follows:
JOURNAL
1986
Dec. 31

"

31

Interest on Capital A/c

To Capital A/ c
(Being interest allowed on capital)

Dr.

Capital A / c
To Interest on Drawings A / c
(Being interest charged on drawings)

Dr.

Rs.
2,575

Rs.
2,575

75
75

3 The relevant items will appear in the final accounts as follows:

Profit and Loss Account
for the year ended December 31,1986
Dr.

Cr

Rs.

. Rs.

2,575 By Interest on Drawings

To Interest on Capital

Balance Sheet (Liabilities side only)

as on December 31,1986

Capital:
Balance on 1-1-1986
Add Additional Capital
Interest on Capital
Less Drawings
Interest on Drawings

Check Your Progress-B

1 What is depreciation?

Rs.
50,000

Rs.

75

Adjustments in Final Accounts

2 Name the two causes of depreciation.

...............................................................................................................
........................................................................................................................

........................................................................................................................
........................................................................................................................

3 w h y do we bring interest on capital and interest on drawings into the booksof

account'?
........................................................................................................................
.............................................................................
...........................................
............. ...........................................................................................................

.........................................................................................................................
-

---

1 8 . 1 BAD DEBTS
---

You know when goods are sold on credit, the personal account of the buyer is debited
and so he becomes a debtor to the business. Later, when he pays the amount due
from him, his personal account is credited. His account thus stands closed.
Sometimes, a debtor fails to p$ his debt either partially or completely. The amount
of debt which cannot be recovered from the debtor is called 'Bad Debt'. It is a loss to
the business and so must be charged to Profit and Loss Account. The following
journal entry is passed when a debt becomes bad.
Bad Debts Account
Dr.
To Concerned Debtor's Account
(Being bad debts)
The effect of this entry will be: (i) debtor's personal account stands closed, and (ii) a
new account called Bad Debts Account is opened in the books.
The total amount of bad debts incurred during the year appears as a separate item in
the Trial Balance and the Sundry Debtors appear at reduced amount. The Bad Debts
Account, like any other account of expenses on losses, is transferred to the Profit and
Loss Account by means of the following closing entry.
Profit and Loss Account
Dr.
To Bad Debts Account
(Being bad debts transferred to
Profit and Loss Account)
,

Bad Debts Given Outside the Trial Balance : Sometimes, the bad debts to be written
off may be stated outside the Trial Balance as an adjustment item. It means that such
bad debts have not been written off. For convenience, we may call them 'further bad
debts'. It is necessary to record such bad debts at the time of preparing the Final
Accounts. This is done by passing the following adjustment entry.
Bad Debts Account
Dr.
To Sundry Debtors
(Being bad debts written off)
Such additional bad debts are treated in the final accounts as follows:
i)

On the debit side of Profit and Loss Account as addition to Bad Debts
already written off.

ii) On the assets side o f the Balance Sheet as deduction from Sundry Debtors
It is important to understand the difference between the treatment of bad debts given
inside the Trial Balance and the bad debts given outside the Trial Balance. You know
that the bad debts given in Trial Balance are those bad debts which have been written
off during the accounting year. It means that the accounts of the concerned debtors
have already been closed. Hence, such bad debts are .not to be deducted from Sundry
Debtors in the Balance Sheet. They will be shown only in the Profit and Loss
. . . .

Account. Bpt, the bad debts given outside the Trial Balance (further bad debts) are
still to be written off. The entry for writing off such bad debts is to be recorded at the
time of preparing final accounts and both the debit and the credit asfiects will appear
in the final accounts as explained earlier. Thus, the bad debts given in the Trial
Balance and also those given outside the Trial Balance will be shown in the Profit and
Loss Account. But only those bad debts will be deducted from Sundry Debtors in the
Balance Sheet which are given outside the Trial Balance.
Look at Illustration 7 and study how bad debts given in Trial Balance and those given
outside the Trial Balance are treated at the time of preparing the final.accounts.

Illustration 7
Following are the extracts of Trial Balance of a business firm:

Trial Balance
as on December 31,1986
Dr.
Cr.
6,500

Name of the Account

Bad Debts
Sundry Debtors

60,000

Adjustment : K. Gaur, a debtor became insolvent. It was learnt that the firm will
receive only Rs. 3,000 as against the total amount of Rs. 6,000 due from him.
Pass necessary adjustpent entry and show how the items will appear in final accounts.
Solution:

JOURNAL
1986
Dec. 31

Rs.

Bad Debts A / c
To K. Gaur
(Being the amount irrecoverable from him)

Dr.

Rs.

3,000
3,000

Profit and Loss Account

for the year ended December 31,1986

Rs.

To Bad Debts
Add Further Bad Debts

6,500
3,000

9,500

Balance Sheet
as on December 31,1986

Rs.
I

Current Assets:
Sundry Debtors
Less Further Bad Debts

60,000
3,000

57,000

18.12 PROVISION FOR B A D DEBTS

In any business where goods are sold on credit, bad debts usually occur. When it is
certain that a debt will not be recovered, the amount is written off as bad debt. But, it
is also likely that some of the remaining debts may not be recovered in full. From
experience we know that certain percentage of amounts due from debtors may not be
recovered. This will be a loss to the business. You have learnt that according to
Conservatism Concept all possible loises must be provided for. Hence it is a common
practice to make a suitable provision for doubtful debts at the time of preparing the
final accounts. Otherwise, the Profit and Loss Account will not reveal the correct

Adjustments in Find Accounts

amount of profit or loss and the Balance Sheet will not show t k t r u e position of
Sundry Debtors. The provision for doubtful debts is usually cakulated as a certain
percentage of the total amount due from Sundry Debtors after writing off all known
bad debts. *
Provision for doubtful debts is also called 'Provision for Bad Debts' or 'Provision
for Bad and Doubtful Debts'. Such provision is made by debiting the amount of
doubtful debts to the Profit and Loss Account thus, the journal entry for creating
such provision will be as follows.
Profit and Loss Account
Dr.
To Provision for Bad Debts Account
/
(Being the provision for doubtful debts)

!
I

You will notice that when a debt is irrecoverable it is written off by crediting it to the
personal account of the respective customer. But, when a debt is doubtful of recovery,
the personal account of the customer will not be credited as the recovery is $till
possible. Thus, the creation of provision far bad debts does not affect the balances of
debtors' personal accounts. However, while showing Sundry Debtors in the Balance
Sheet the amount of such provision is deducted therefrom. Look at Illustration 8 and
study how provision for doubtful debts is made and treated in the final accounts.

Inustration 8
An extract from a trader's Trial Balance on December 31, 1986 is given below.

i
Name of the Account

Dr.

Rs.

Cr

Rs.

Sundry Debtors
Bad Debts

Adjustment : Write off further bad debts of Rs. 2,000 and create a provision for
dnuhtfiil
--------rle
~ b t ats 5% on debtors.
Pass the necessary journal entries and show the Bad Debts-and Provision for Bad
Debts Accounts. *Iso show the treatment in the final accounts.
C
i

Solution:

JOURNAL
Dr.

Rs .
2,000

Rs.
7

(Being bad debts written off)

Profit and Loss A / c

To Bad Debts A/c
(Being Bad Debts Account transferred to
Profit and Loss Account)

Dr.,

~rofit'andLoss A/ c
To Provision for Bad Debts A/ c
(Being the provision required for doubtful debts)

Dr.

Note : There are further bad debts of Rs. 2,000 given outside the Trial Balance. Hence, the provision for
bad debts has been cakulated on Rs. 30,000 (total debts Rs. 32.000-further bad debts Rs. 2,000).
The bad debts of Rs. 3,000 given inside the Trial Balance need not be deducted from Sundry
Debtors as they have already been written off during the year. Thus, the provision on Rs. 30,000 at
5% will be Rs. 1,500.

LEDGER
Bad bebts Account
Dr.
1986
Dec. 3 1
" 31

Cr.

~4

1986
3,000 Dec. 31

To Balance b/ d
To Sundry Debtors
I

*.""-I

I
I

Rs.
5,000

By Profit and Loss A/c

*,YYV

3J

Final Accounts-I1

Provision for Bad Debts Account

The items 'bad debts' and 'provision for bad debts' will appear in the final accounts
as follows:
Profit and Loss Account
for the year ended December 31,1986

Dr.
T o Bad Debts
To Provision for Doubtful
Debts

Rs.
5,000

1,500

Balance Sheet
as on December 31,1986
Current Assets:
Sundry Debtors
Less Further Bad Debts

Less Provision for

Doubtful Debts

--

When Provision for Bad Debts already Exists in the Books: The provision created for
doubtful debts at the end of a particular year will be carried forward to the next year
and it will be used for meeting the loss due to bad debts incurred during the next
year. The Provision for Bad Debts brought forward from the previous year is called
the 'opening provision' or 'old provision'. So when such provision already exists, the
loss due to bad debts during the current year will be adjusted against the provision
and not charged to the Profit and Loss Account. If however, bad debts during the
current year are more than the old provision, the excess can be debited to profit and
Loss Account. The provision for bad debts required at the end of the current year
which can now be called 'new provision' will be created by debiting the Profit and
Loss Account. Suppose the balance of old provision for bad debts on January 1, 1986
is Rs. 1,000. The bad debts written off during 1986 amounted to Rs. 1,200 and the
new provision required on December 31, 1986 is Rs. 1,500. In such situation, Profit
and Loss Account will be debited with Rs. 1,700 as calculated below:

Total Loss due to Bad Debts

Less Old Provision for Bad Debts
Excess Loss on account of Bad Debts
Add Provision required at the end of
the year
Amount to be debited to Profit and
Loss Account

Rs.
1,200
1,000
200
1,500

But if the old provision is more than the loss due to bad debts, the surplus provision
will be adjusted against the new provision required at the end of the current year.
Thus the Profit and Loss Account will be debited with the difference only.

36

Suppose, in the example given above, the bad debts written off during 1986 were Rs.
600 (not Rs. 1,200). In that case, the Profit and Loss Account would be debited with
Rs. 1,100 as calculated below:

Rs.
1,000
600

Existing Provision for Bad Debts

Less Bad Debts

Adjustments in Final Accounts

Surplus provision available

Provision required at the end of the year
Less Surplus of Old Provision
Amount to be debited to Profit and Loss
Accbunt
If, however, the new provision is less than the surplus of old provision available,
difference will be shown on the credit side of the profit and Loss Account.
In this connection it is necessary to note that only the further bad debts given outside
the Trial Balance and the new provision for bad debts should be deducted from
Sundry Debtors in the Balance Sheet.
A summary of various points discussed above is given below for your benefit.
i) Find out the actual bad debts during the current year. This will be the total of bad
debts appearing both inside and outside the Trial Balance.
ii) Calculate the new provision for doubtful debts as given in the adjustments.
iii) Work out the total of actual bad debts and the new provision.
vi) Deduct the old provision for bad debts as given in the Trial Balance from the
above total and debit the Profit and Loss Account with the net amount thus
arrived at.
!

The above aspects will be shown on the debit side of the Profit and Loss Account as
follows:

Rofit and Loss Account

for the year ended

............

Dr.

Cr.

Rs.
To Provision for Bad Debts:
Provision
Required (new)
Add Bad Debts

........
........

Less Existing
Provision (old)

........

If the total of new provision and the actual bad debts are less than the old provision,
all the above details will be shown on the credit side of the Profit and Loss Account
as follows.
Roiit and Loss Account
for the year ended

..............

Dr.

Cr.

Rs.

Rs.
Provision for Bad Debts:
Existing Provision (old)

.......

Less Bad Debts

.......
......

Less Provision
Required (new)

........

Final ~ccounts-11

The following are the journal entries required when the provision for bad debts exists
in the books:
a) For writing off further bad debts given outside the Trial Balance:
Bad Debts Account
'To Sundry Debtors
b) For transferring the total Bad Debts Account to Provision for Bad Debts
Account:
Provision for Bad Debts Account
Dr.
To Bad Debts Account
c) For debiting the Profit and Loss Account with the excess of the total bad debts
plus new provision over the old provision:
Profit and Loss Account
Dr.
To Provision for Bad Debts Account
For crediting the Profit and Loss Account with the excess of the old provision
over the total bad debts plus new provision:
Provision for Bad Debts Account
Dr.
To Profit and Loss Account

Illustration 9
On January 1, 1986 the provision for bad debts stood at Rs. 1,100. During the year
bad debts totalled to Rs. 900. At the end of the year the sundry debtors were
Rs. 20,000. The provision is to be maintained at 5% of the debtors. Pass the necessary
journal entries and show the Bad Debts Account and the Provision for Bad Debts
Account. Also show how these items will appear in the final accounts.

Solution:
JOURNAL
1986
Dec. 31

Provision for Bad Debts A / c

To Bad Debts A / c
(Being the transfer of Bad Debts
Account to Provision for Bad
Debts Account)

Dr.

Profit and Loss A / c

To Provision for Bad Debts A / c
(Being the additional provision
made)

Dr.

Rs.
900

Rs.
900

Note: The amount chargeable to the Profit and Loss Account has been worked out as
follows:

Rs.
900

Bad Debts
New Provision at 5% on Sundry
Debtors (Rs. 20,000)
Total of actual and expected loss
Provision already existing
Additional Provision reqiired

800

LEDGER
Bad Debts Account

Cr.

Dr.
1986
Dec. 31

38

To Balance b/d

Rs.
900

1986
Dec. 3 1

Rs.
By Provision for
Bad Debts A / c

900

Adjustments in Final Accoull.,

Provision for Bad Debts Account

1986
Dec. 31
" 31

Rs. 1986
900 Jan. I
1,000 Dec. 31

To Bad Debts A / c
To Balance cld

1,900

98i
Jan. 1

Rs.
1,100
800

By Balance b/ d
By Profit and Loss A/c

By Balance b / d

Profit and Loss Account

for the year ended December 31,1986

Rs.
To Provision for Bad Debts:
Provision Required
Add Bad Debts
Less Existing Provision

1,000
900
1,900
1,100

Balance Sheet
as on December 31,1986
Rs.
Current Assets:
Sundry Debtors
Less Provision for
Doubtful Debts

Rs. *.

20,000
1,000

19.000

18.13 PROVISION FOR DISCOUNT ON DEBTORS

You know cash discount is allowed to debtors as an incentive for prompt payment.
When the discount is allowed, it is recorded through the Cash Book and posted to the
credit side of the concerned debtors' personal accounts. But, in the case of debts
outstanding at the end of the current year, discounts will be allowed in the next year if
the debtors make prompt payments. So, as in the case of anticipated loss on account
of doubtful debts, a provision must be made for the discount likely to be allowed to
the debtors in the next year. Such a provision is known as the 'Provision for Discount
on Debtors'. It is also calculated as a percentage on the net sundry debtors (remaining
after deducting provision for bad debts). For example, if Sundry Debtors amount to
Rs. 40,000 and the firm wants to create a provision for bad debts at 5% and a
provision for discount at 2% on the debtors, they will be calculated as follows:
i)

The Provision for Bad Debts will be calculated at 5% on Rs. 40,000. It will
amount to Rs. 2,000.

ii) The Provision for Discount at 2% will be calculated on the debtors after
deducting the Provision for Bad Debts i.e., on Rs. 38,000 (40,000-Rs. 2,000). It
will amount to Rs. 760.
Note that when both Provision for Bad Debts and Provision for Discount on Debtors
are to be calculated, the Provision for Bad Debts is calculated first and then Provision
for Discount is worked out on debtors after subtracting the Provision for Bad Debts.
The adjustment entry for Provision for Discount on Debtors is as follows:
Profit and Loss Account
Dr.
To Provision for Discount on
Debtors Account
(Being the provision made for
discount on debtors)

Final Accounts-11

The provision for discount on debtors will be shown in the final account as follows:
i) On the debit side of Profit and Loss Account: as a separate item.
ii) On the assets side of Balance Sheet: as a deduction from Sundry Debtors.
The balance of the Provision for Discount on Debtors Account will be carried
forward to the next year and the discounts allowed, if any, in the next year will be set
off against the provision itself. The method of dealing with discounts allowed and
provision for discount on debtors in the next year is similar to the method followed in
case of bad debts and provision for vad debts.

18.14 PROVISION FOR DISCOUNT ON CREDITORS

When prompt payment is received vfe allow cash discount to debtors. Similarly we
receive discount from the creditors when prompt payments are made by us. So the
expected gain on account of discounts receivable from creditors in the next year
should also be taken into account at the time of preparing the final accounts. Such a
provision is called 'Provision for Discount on Creditors'. It is also calculated as a
percentage on sundry creditors. The creation of such a provision however, goes
against the convention of conservatism. Hence, it is usually avoided in practice. But
you must learn how it is treated in final accounts if such a provision is required.
The adjustment entry for provision for discount on creditors is passed as follows:
Provision for Discount on Creditors Account
Dr.
To Profit and Loss Account
(Being the provision made for discount
on creditors)
The provision for discount on creditors will appear in the final accounts as follows:
i) On the credit side of Profit and Loss Account: as a separate item.
ii) On the liabilities side of the Balance Sheet: as a deduction from sundry creditors.
The balance of the Provision for Discount on Creditors Account willalso be carried
forward to the next year and the discounts received, if any, in the next year will be
adjusted against the provision itself.

Check Your Progress-C

1 . Fill in the blanks.
a) If bad debts appear as an adjustment outside the Trial Balance, they are
adjusted by debiting Bad Debts Account and crediting ...........................
b) The amount of bad debts given in the Trial Balance is shown only in .......................
c) Provision for Bad Debts is calculated as a certain percentage on Sundry
Debtors after deducting ...................................
d) Provision for Bad Debts is created by .................................... the Profit and
Loss Account.
e) Provision for Discount on Debtors is calculated as a fixed percentage on Sundry
Debtors after deducting .........................................
f) Provision for Discount on Creditors is made by ...........................Profit and
Loss Account.
2. Following is an extract from Ttial Balance of a trader:
Rs.

Bad Debts
Provision for Bad Debts
Sundry Debtors

3,000
4,000
so7000

The adjustments required are

i) Additional Bad Debts amounted to Rs. 2,000
ii) Provision for Bad Debts is to be maintained at 5% on Debtors
Compute: a) New Provision for Bad Debts
b) Amount to be debited to Profit and Loss Account
c) Net amount of Debtors to be shown in the Balance Sheet

18.15

Adjustments in Final Accounts

LET US SUM UP

1 It is necessary to make adjustments with regard to certain items such as prepaid

expenses, depreciation, etc. at the time of p r e p ~ n the
g final accounts so as to
arrive at the current profit or loss and the correct financial position.
2 The adjustments are always made by mean&of suitable journal entries known as
'adjustment entries'.
3 Every adjustment is shown at two places in the final accounts. Table 18.1 shows the
adjustment entries and their treatment in the final accounts for different items.

Table 18.1
Adjustment of Various Items
S.No.
1

Adjustment
Closing Stock

Adjustment Entry
Closing Stock A/c
To Trading A/c

Treatment in the Final Accounts

Dr. i) Credit side of Trading A/c: Shown as a
separate item
ii) Asset side of Balance Sheet: Shown as a
separate item under Cumnt Assets

Dr. i) Debit side of Trading A/c or Profit and

Outstanding Expenses Expense A/c
Loss A/c: Added to the concerned expense.
To Outstanding
ii) Liabilities side of Balance Sheet: Shown
Expense A/c
as a separate item under Cumnt Liabilities.

Outstanding Incomes

Outstanding Income
i) Credit side of Profit and Loss A/c: Added
A/ c
Dr.
to the concerned income
To Income A/c
ii) Assets side of Balance Sheet: Shown as a
separate item under Cumnt Assets.

Prepaid Expenses

Prepaid Expenses
i) Debit side of Profit and Loss A/c: Deducted
A/c
Dr.
from the concerned expense
ii) Assets side of Balana Sheet: Shown as a
To Expense A/c
separate item under Cumnt Assets.

Income Received
in Advance

Income A/c
Dr. i) Credit side of Profit and Loss A/c: DeducTo Income Received
ted from the concerned income.
ii) Liabilities side of Balance Sheet: Shown as a
in Advance A/c
separate item under Current Liabilitica

Depreciation

Depreciation A/c
To A m t A/c

Interest on Capital

Intemt on Capital
i) Debit side of Profit and Loss A/c:
A/c
Dr.
Shown as a separate item
To Capital A/c
ii) Liabiities side of Balance Sheet: Added
to Capital

Interest on Drawings

Capital A/c or
i) Credit side of Profit and Loss A/c:
Drawings A/c
Dr.
Shown as a separate item
To Interest on
ii) Liabilities side of Balana Sheet:
Deducted from capital
Drawings A/c

Bad Debts (Additional) Bad Debts A/c

Dr. i) Debit side of Profit and Loss A/c:
To Sundry Debtors
Added .o bad debts
ii) Assets side of Balana Sheet: Deducted
from Sundry Debtore '

10

Provision for Bad

Debts

Profit and Loss

i) Debit side of Profit and Low A/c:
A/c
Dr.
Shown as a separate item
To Provision for
ii) Assets side of Balana Sheet: Deducted
Bad Debts A/c
from Sundry Debtors

11

Provision for
Discount on Debtors

Profit and Loss

i) Debit side of Profit and Loss A/c:
A/c
Dr.
Shown as a separate item
To Provision for Dis- ii) Assets side of Balana Sheet: Deducted
from Sundry Debtore
count on Debtor A/c

12

Provision for Discount Provision for Discount i) Credit side of Profit and Loss A/c:
on Creditors
on Creditors A/ c
Dr.
Shown as a Separate item.
ii) Liabilities side of Balana Sheet:
To Profit and Loss
A/c
Deducted from Sundry Creditors

I
I

Dr. i) Debit side of Profit and Loss A/c: Shown

as a separate item.
ii) Assete side of Balance Sheet: Deducted from
the concerned fixed asset

Final Accounts-11

18.16 KEY WORDS

Adjustment Entry: Journal entry passed to make an adjustment in the relevant
accounts.
Adjustment Item: An item given outside the Trial Balance which requires adjustment
at the time of preparing final accounts.
Adjusted Purchases: Amount of purchases after adjusting both the opening and
closing stocks.
Bad Debts: Debts which cannot be recovered.
Depreciation: A permanent decrease in the value of a fixed asset caused by wear and
tear or the passage of time.
Doubtful Debts: Debts of doubtful recovery.
Outstanding Expenses: Expenses incurred during the accounting year but not yet
paid.
Outstanding Incomes: Incomes earned during the accounting year but not yet
received.
Prepaid Expenses: Expenses paid but the benefit of which is yet to be received.
Provision for Bad Debts: A provision made for loss expected to arise from doubtful
debts.
Provision for Discount on creditors: A provision made for the anticipated gains on
account of discounts receivable from creditors.
Provision for Discount on Debtors: A provision made for discounts likely to be
allowed to debtors.
Unearned Incomes: Income in respect of which the services are yet to be rendered.

18.17 SOME USEFUL BOOKS

Grewal, T.S. 1987. Double Entry Book-keeping, Sultan Chand & Sons: New Delhi.
(Chapter 9)
Frank Wood. 1986. Book-kmping and Accounts, Pitman Publishing Ltd: London.
(Chapters 21 and 22)
Maheshwari, S.N. 1986. Principles and Practice of Accountancy, Arya Book Depot:
New Delhi. (Chapter 14)
Patil, V.A., and Korlahalli, J.S. 1985. Principles and Practice of Book-keeping,
R. Chand & Co: New Delhi. (Chapter 20)

18.18 ANSWERS TO CHECK YOUR PROGRESS

A
C

5
1

(a) iii
(b) i
(c) iii
(d)
a) Sundry Debtors
b) Profit and Loss Account
c) further or additional bad debts.
d) .debiting
e) Provision for Bad Debts
f) Crediting
a) Rs.2,400
b) Rs. 3,400
c) Rs. 45,600

ii

(e) i

18.19 TERMINAL QUESTIONSIEXERCI'SES

Questions
1 Why adjustment entries are necessary at the time of preparing final accounts?

Name any two items of adjustment and explain how they will be shown in the final
accounts.
2 Distinguish between:
a) Outstanding Expenses and Prepaid Expenses
b) Interest on Capital ahd Interest on Drawings
c) Outstanding Income and Unearned Income.
3 What is meant by Provision for Bad Debts? Explain the treatment of Provision for
Bad Debts in the final accounts.
4 What do you mean by Provision for Discount on Debtors and Creditors. Explain
their treatment in the final accounts.

Adjwtmtats in Final Accounts

Exercises
1 Give Journal entries for the following adjustments:
a) Salaries Outstanding Rs. 3,000.
b) Prepaid Rent Rs. 600.
c) Commission earned but not yet received Rs. 500.
d) Depreciation at 5% on Furniture of Rs. 20,000.

2 Give Journal entries for the following adjustments:

a) Interest at 5% on Capital of Rs. 80,000.
b) Interest on Drawings Rs. 120.
c) Provision for Discount at 2% on Debtors totalling Rs. 30,000.
d) Prokisian for Discount at 1.5% on Creditors totalling Rs. 20,000.
3 On January 1, 1987 the provision for Bad Debts stood at Rs. 1,000. The total
debtors on December 31, 1987 as Rs. 20,600 but out of which Rs. 600 were bad
apd had to be written off. The provision is to be maintained at 5% of the debtors.
Give journal entries and show the Bad Debts Account and the Provision for Bad
Debts Account. Also show how these items will appear in the final accounts.
(Answer: New Provision for Bad Debts Rs. 1,000; Debit Profit and Loss Account
with Rs. 600)
4 On January 1, 1987 the Provision for Bad Debts stood at Rs. 3,000. During the
year bad debts totalled to Rs. 1,000. At the end of the year the total debtors were
Rs. 24,000. The provision is to be maintained at 5% on the debtors. Prepare
Provision for Bad Debts Account and show how Bad Debts and
Provision for Bad Debts will appear in the final accounts.
(Answer: New Provision for Bad Debts Rs. 1,200; Credit Profit and Loss Account
with Rs. 800)

5 State the effect of the following adjustments on the profits of a trader.

i) Rs. 2,400 for salaries owing t~ staff
ii) Insurance prepaid Rs. 710
iii) Furniture valued at Rs. 12,000 to be depreciated by 10%
iv) Create Provision for Bad Debts Rs. 2,000
v) Rent Receivable Rs. 350
Before making the above adjustments the net profit was Rs. 20,000.
(Answer: i) Reduction in profit ii) Addition to profit iii) Reduction in profit
iv) Reduction in profit v) Addition to profit
Net Effect: Profits will decrease to Rs. 15,460)

Note: These questions will help you to understand the unit better. Try to write
answers for them. But do not submit your answers to the University. These
are for your practice only.

- --

--

43