Exclusively to CA ICWA,CS Students or others who wants to learn Accounts thoroughly

How to solve difficult adjustments in Financial Accounts
CA CPT, ICWA entrance,ACS entrance students should read this These slides Are prepared Only to Clarify major Doubts To students And staff.

By Only Difficult Professors Augustin Amaladas Adjustments and Shanthi Augustin are
M.Com(Loyola, Chennai)., AICWA Alternative work is rest explained

Why does Equity shares and fixed assets appear first in the Balance sheet
‡ The balance sheet is prepared in order. Left hand side liabilities and right hand side Assets. If business comes to an end the liability which is paid last is share capital. The last asset which is sold out will be fixed asset. Among fixed assets goodwill(good name) is sold out last.No one wants to sell one¶s name unless everything is lost.The order of arrangement is known as order of

permanence.
‡ What is the Order of Liquidity?

Order of Liquidity?
‡ The liability which is disposed off first comes first in the balance sheet. The asset which is used to pay liability first appears first in the assets side. ‡ Therefore cash appears first in the balance sheet asset side. And Creditors should appear in the liability side first. ‡ The above two orders are known as marshalling

Income tax paid by sole proprietor and partnership business-Journal entry?
‡ Income tax does not recognise sole proprietor or firm as a unit but the individuals who run the organisation are recognised. ‡ Income tax is a direct tax. Direct taxes such as Income tax, wealth tax are to be paid by the individual who runs such organisation.It is a personal liability even such incomes from business. ‡ If business money is used for personal use of paying tax, then such payment to be treated as drawings. ‡ Journal entry: Debit drawings and credit Cash. ‡ Note: do not debit incometax account. ‡ If you debit income tax account it means that its treated as business expenditure. It is wrong in this case.

The payment of tax is the liability of the company. SHARE HOLDERS ARE DIFFERENT FROM COMPANY. ‡ Journal entry: Debit Income tax account and credit Cash account. ‡ It is a business expenditure. . It is not the liability of Shareholders.If Income tax paid by company? ‡ Company is a separate legal entity.

It is a business expenditure.How do you deal indirect taxes? ‡ Indirect taxes such as sales tax. export duty are actually imposed on the individual who buys such article. Octroi duty. ‡ Journal entry: Debit sales tax a/c Credit cash a/c . It is not the responsibility of the individuals who run the business but by the business itself. excise duty. import duty.

Double entry / Single entry ‡ Is Accounting based on business concept or religious concept? .5.

Who ever gives given credit.It is based on religious concept ‡ Giving first and receiving later. . What ever goes out of you to be credited because god will reward you.whoever receives given debit.What ever comes to you is given debit because god will take away from you.Receiving is left hand function. ‡ Giving is right hand function. ‡ Giving cash receiving machinery ‡ God is an accountant for every business.

patent rights ‡ Nominal rule/account: income and expenditure: salary. goodwill. .cash.Rules of acccounting ‡ Personal rule/Account-supplier debtors. insurance. building. outstanding wages ‡ Real rule/Account. furniture. bank. rent . internet expenses. commission. owner. banker. cell phone expenses.

Personal rule ‡ Debit the receiver ‡ credit the giver ‡ Example: Computer chips purchased on credit from wipro ‡ Here credit Wipro as Wipro is the giver of computer. ‡ Sold goods to Meena ‡ Meena is the receiver-debit .

A) cash because it comes in B) debtors given money. credit debtors.PERSONAL RULE. ‡ Cash related to real rule because we can see. Cash goes out ±related to real rule-credit cash.Amount collected from debtors? ‡ 2. Banker is the receiver ±related to personal rule therefore debit bank. .Exercise ‡ 1.Amount deposited to bank? ‡ Answer 1: two accounts to be selected. 2.The giver to be given credit. ‡ Therefore Journal entry Is: Debit cash.

Real rule ‡ These are the accounts of assets and liabilities ‡ Rule: debit what comes in ‡ Credit what goes out .

Goods supplied for cash ‡ 2.Land purchased by giving a cheque ‡ 5.Cash withdrawn from bank ‡ 3.Cash withdrawn from bank for personal use ‡ 4.Building sold on credit .Excercise ‡ 1.

JE: Cash a/c debit Bank a/c credit Note: Cash withdrawn does not mean drawings.Both are related to real rule. ‡ JE: Goods A/c debit Cash A/c credit 2. Both are related to real rule. Person who supplied is not important as it is a cash transaction.Only when cash withdrawn for personal use we consider it as drawings. .Cash and bank are two accounts.Goods and cash are two accounts required.‡ Answer: 1.

Building sold on credit. ‡ He is not a dealer in building. ‡ JE:The person who buys a/c debit ‡ Building account credit.If he is not a dealer in building we can not consider it as goods. . Only when they are goods they can be taken to sale(Revenue income) otherwise they should be removed from capital expenditure.‡ 5.

Debit what comes in and credit what goes out. ‡ JE: Land A/c debit ‡ bank A/c credit .Debit the receiver.Both are related to real rule.‡ 3. therefore debit drawings and credit bank as banker is the giver of cash. Cash with drawn for personal use:owner and cash is important.Land purchased by giving a cheque: ‡ Land and bank are two important. ‡ JE: Drawings a/c debit ‡ Bank a/c credit ‡ 4. Owner is personal rule and cash is related to real rule.

Nomi al r le ‡ Related to Expe ses a d i come ‡ R le: Debit all expe ses a d losses ‡ gai s Credit all i comes a d .

000(Cash a/c debit and share premium to be credited as it belongs to nominal rule) .Exercise ‡ Rent paid Rs 50.000(Rent debit and cash credit) ‡ Wages paid Rs.1.000(Discount is related to nominal rule.60.2.000(Cash A/c debit and commission a/c to be credited) ‡ Discount allowed to customer ± Rs.00.00.000(wages debit and cash credit) ‡ Wages outstanding-Rs.2500(Telephone a/c debit and cash to be credited) ‡ Shares issued at premium-Rs.X to be credited) ‡ Commission received-25.debit discount and credit debtors who had given cash) ‡ Telephone bills paid-Rs.1.000(wages a/c debit and outstanding wages to Mr.

Suitable questions to pass journal entry ‡ If cash transaction. person is not important ‡ Every birth of an account there is a death of the account ‡ Ask what comes in? ‡ Or what goes out? .

Debit the receiver and credit the giver. . ‡ Debtors account follow personal rule. Debit all expenses and losses and credit all income and gains.What is the journal entry for bad debts? ‡ Bad debt a/c debit ‡ to debtors a/c ‡ Bad debt follows nominal rule.

Journal entry for provision for bad and doubtful debts? ‡ Profit and loss account Debit ‡ credit provision for bad and doubtful debts ‡ Reasons:.All provisions are taken out of profits. All provisions are future expected liabilities. It means profit is reduced and provision to be increased. .

X )credit. ‡ Rent appears in the profit and loss account debit side ‡ Rent outstanding appears in the balance sheet under the head current liabilities. .Rent and rent outstanding exp ‡ JE: Rent debit and cash credit ‡ Rent outstanding: ‡ Rent debit and rent outstanding to some one(say Mr.

. ‡ No journal entry as it is not a real liability on the date of balance sheet. Court case against the company ‡ 2. contract yet to be completed.What is contingent liability? ‡ Liability which may or may not happen depends on the future situations ‡ Example:1.

Final Accounts Adjustments ‡ Domestic house hold Expenses(Drawings a/c debit and cash credit) ‡ Income tax refund( It is a personal income.If it is taken to the business then cash a/c debit and capital a/c credit) ‡ Income from house property( cash a/c debit and capital credit) as personal income has been taken to business. ‡ Un expired insurance(Unexpired insurance debit(asset) insurance premium a/c credit) .

debit income a/c and credit income received in advance a/c credit) ‡ Interest on Capital( it is an expenditure. Interest on capital a/c debit and capital account credit) ‡ Provision on Doubtful debts(Profit and loss a/c debit and provision for bad and doubtful debts credit) .‡ Income received in Advance(It is a liability.

‡ Deferred revenue expenditure((HUGE Revenue expenditure incurred during the current year but can not be treated as one year expenditure as the benefit will come for more than a year.‡ provision for Discount on debtor( Profit and loss account debit and provision for discount on debtors credit)It is because all provisions are taken from profit and loss account.) ‡ JE: Deferred revenue expenditure a/c debit and cash to be credited. .

. Therefore: Manager¶s commission a/c debit and Outstanding commission a/c credit.Final Accounts Adjustments ‡ Reserve Fund( all reserves taken from profit. debit profit and loss a/c and credit Reserve fund) ‡ Goods Distributed as free sample( goods with drawn other than trading activity: Advertisement a/c debit and purchase a/c credit) ‡ Manager¶s Commission( he is entitled to receive commission.

There is no such account is seen any where in the books.Bad debts written off recovered ‡ Once bad debts written off means that it is completely removed from debtors and transferred to profit and loss account as a loss. ‡ If recovered such recovery does not affect debtors but affects profit and loss account ‡ JE: Cash a/c debit ‡ Bad debts recovery or profit and loss a/c credit .

Operating activity becomes non operating activity or extraordinary activity. ‡ JE: Insurance company a/c debit(like a debtor or asset) loss of stock a/c debit Trading a/c or purchase account .Goods destroyed due to fire and insurance company partly accepted ‡ Goods which are meant for trading destroyed.

‡ Since we pass journal entry for adjustments they appear twice in the final accounts.Example:rent outstanding means rent account. Insurance prepaid means insurance account. ‡ It means any item appears in the trial balance means that we had already passed journal entry. . ‡ The head of the account is important when you pass a fresh journal entry for adjustments.What do you mean by adjustment accounting point of view? ‡ It means pass a fresh journal entry. interest due means interest account. That is why such items appear only once in the final account.

. Therefore it should not appear in the trading account. Being an asset it should appear in the Balance sheet.If closing stock appears in trial balance where should appear in the final accounts? ‡ If it appears in the trial balance means we had passed journal entry for such stock and adjusted with purchases to calculate cost of goods sold.

‡ Take such item to balance sheet as a liability. .Out standing expenses(rent) given in the trial balance? ‡ It means it is already journal entry passed and adjusted with rent account(added to rent) ‡ Do not adjust with rent in profit and loss account.

. therefore advanced income tax also to be considered as drawings onle ‡ JE: Drawings a/c debit and cash a/c to be credited.How do you deal advanced income tax paid by proprietor? ‡ Income tax paid itself is considered as drawings.

‡ If such bad debt is given in the adjustments? . ‡ As a loss it should appear in the profit and loss account.Bad debts given in the trial balance? ‡ It means journal entry was passed and adjusted against debtors(head). Do not adjust such bad debts against debtors in the balance sheet.

‡ It means pass a fresh journal entry for the new bad debt and to be adjusted with the head of such account(Debtors). ‡ Reduce such bad debt from debtors in the balance sheet before calculating provision for bad and doubtful debts. ‡ As a new bad debt add to the existing bad debts which is given in the trial balance which will appear in the profit and loss account. .

.Do we deduct discount allowed given in the adjustment from debtors before calculating provision for bad and doubtful debts? ‡ Yes. There is no doubts about it. It is because it is given in the adjustment and also it is certain that such debtors already gone out of books of debtors. The provision is always calculated only on debtors who are shaky.

If goods sent out on Higher purchase how do you deal? ‡ If on the balance sheet date if such goods are with the customer divide the goods into two = Debtors Cost + Profit Add to Closing stock in trading a/c and Balance sheet Reduce from debtors .

‡ The concept is that one person can not transfer to oneself.What is the JE when goods are received by consignee from consignor? ‡ No journal entry. Even though the goods are physically in the hands of consignee but there is no transfer of goods taken place from consignor to consignee. .Owner ship should be transferred to pass journal entry. Why? ‡ Owner ship is not transferred from consignor to consignee.

Unless goods are transferred to third party no profits can be realised. ‡ One person can not earn profit by transferring to one self. income tax. . what is the journal entry? ‡ No journal entry as ownership is not transferred.In fact there can not be any sales tax.When branch sends goods to head office or vice versa.

If sales return given in the adjustment? ‡ It means we have to pass a fresh journal entry. . ‡ JE: Sales a/c Debit Debtors account credit We have to reduce sales and debtors once goods are returned.

‡ Cost per unit will be inflated. . ‡ If abnormal loss occurs why do we pass journal entry? ‡ It is because some portion will be recovered from insurance and some portion will be the loss to be written of against profit.You make customer to bear the total cost.What is the JE when normal loss occur? ‡ No Journal entry. Why.

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