Chart showing the treatment of adjustments in the preparation of Final Accounts
How dealt with in Æ
Sl. Type of Adjustment Adjustment Entry
No.
1. Closing stock Closing Stock A/c Dr
To Trading A/c
2. Outstanding Expenses: Respective Expenses A/c
(Wages, Rent, Salaries To Respective outstanding
etc.) expenses A/c
Example:
Wages A/c
To Wages outstanding A/c
Salaries A/c
To Salaries outstanding A/c
3. Prepaid Expenses: Respective prepaid
(Insurance Premium) Expenses A/c
To Respective Expenses A/c
Example:
Prepaid Insurance Premium
A/c
To Insurance Premium A/c
4. Accrued Income Accrued Income A/c
(Commission) To Respective Income A/c
Example:
Accrued Commission A/c
To Commission A/c
5. Income received in Respective Income A/c
advance (Rent) To Respective Income
received in advance A/c
Example:
Rent received A/c
To Rent received in
advance A/c
18
Trading or Profit and Loss Balance
account Sheet
Credit side of the Trading A/c Asset side.
Dr i. If the outstanding is an Liabilities
item chargeable to Trading side.
A/c, add the outstanding
expenses with relevant
expenses in the debit side
of the Trading A/c.
Dr ii. If it is an item chargeable
to Profit and Loss A/c, add
the outstanding expenses
to the relevant expenses in
the debit side of the Profit
and Loss A/c.
Debit side of Trading & Profit Assets side.
Dr and Loss A/c by way of deduc-
tion from respective expenses
A/c.
Dr
Dr Credit side of Profit and Loss Assets side.
A/c by way of addition to
respective Income A/c.
Dr Credit side of Profit and Loss Liabilities
A/c by way of deduction from side.
the respective income A/c.
Dr
6. Interest on Capital Interest on Capital A/c Dr Debit side of Profit and Loss Liabilities
To Capital A/c A/c side by way
of addition to
the Capital
7. Interest on Drawings Capital A/c Dr Credit side of the Profit and Liabilities
To Interest on drawings A/c Loss A/c side by way
of addition to
the d r a w i
n g s which
are ultimately
deducted
from the
Capital.
8. Interest on Loan (Inter- Interest A/c Dr Debit side of Profit and Loss Liabilities
est on Bank Loan) To Interest Outstanding A/c A/c by way of addition to the side by way
Example: appropriate interest A/c of addition to
Interest on Bank Loan A/c the particular
To Interest Outstanding A/c loan A/c
9. Interest on Investments Accrued Interest on investments Credit side of Profit and Loss Assets side
A/c Dr A/c by way of addition to the by way of
To Interest received A/c appropriate interest A/c. addition to
the particular
investment
A/c
10. Depreciation on Fixed Depreciation A/c Dr Debit side of Profit and Loss Assets side
Asset To Fixed Asset A/c A/c. by way of
Example: deduction
Depreciation A/c Dr from the
To Machinery A/c concerned
as set
account.
11. Bad debts Bad debts A/c Dr Debit side of Profit and Loss Assets side
To Sundry debtors A/c A/c by way of
deduction
from Sundry
debtors
12. Provision for Bad and Profit and Loss A/c Dr i. If the provision for bad and Assets side
doubtful debts. To Provision for Bad and doubtful debts is given out- by way of
doubtful debts A/c side the Trial balance, then deducting
it is shown on the debit side New Provi-
of Profit and Loss account. sion alone
ii. If provision for bad and from Sundry
doubtful debts is given in the debtors
Trial Balance (Old) and also
in the adjustment (New):
Add new provision for bad
and doubtful debts with bad
debts written off.
a) If the old provision for bad
and doubtful debts is less
than the above total, then
the difference will be shown
on the debit side of the Prof-
it and Loss account.
b) If the old provision for bad
and doubtful debts is more
than the above total, then
the difference should be
shown on the credit side of
the Profit and Loss account.

19
13. Provision for Discount Profit and Loss A/c Dr Debit side of Profit and Loss Assets side
on Debtors To Provision for discount on A/c (Amount of provision for by way of
debtors A/c discount is ascertained on deduction
good debtors) from Sundry
debtors (after
deduction of
bad debts
and new
provision
for bad and
doubt- ful
debts)
14. Provision for Discount Provision for Discount on Credit side of Profit and Loss Liabilities
on Creditors Creditors A/c Dr A/c side by way
To Profit and Loss A/c of deduction
from Sundry
Creditors.

Format :
Trading and Profit and Loss Account of
st
Thiru............ for the year ending 31 March, ........
Dr. Cr.

Particulars Rs. Rs. Particulars Rs. Rs.

To Opening stock xxx By Sales xxx
To Purchases xxx Less: Sales returns xxx
Less: Purchases returns xxx Xxx
xxx By Closing Stock Xxx
To Wages xxx
Add: Outstanding wages xxx
xxx
To Factory rent xxx
Less: Prepaid Factory rent xxx
xxx
To Gross Profit c/d (Transferred xxx
to Profit & Loss A/c)
xxx xxx
To Salaries xxx By Gross Profit b/d xxx
Add : Outstanding Salaries xxx (Transferred from Trading
xxx A/c)
Insurance premium xxx By Commission received xxx
Less: Prepaid Insurance Add: Commission accrued
Premium xxx but not yet received xxx
xxx Xxx
To Interest on Capital xxx By Rent Received xxx
To Interest on loan xxx
Add: Interest on loan Less: Rent received in
outstanding xxx advance xxx
xxx Xxx
 By Interest on drawings xxx
To Depreciation on: xxx By Discount received xxx
Fixed Assets, By New provision for
Buildings, Machinery, discount on creditors (given xxx
Furniture etc. in adjustment)
Less: Old provision xxx
To Bad debts xxx xxx
Add: New Bad Debts xxx
(given in adjustment)
xxx
Add: New Provision for bad
& doubtful debts (given in xxx
adjustment)

xxx
Less: Old Provision xxx
xxx
To Discount allowed xxx
To New Provision for discount
on debtors xxx
(given in adjustment)
Less: Old Provision xxx
xxx
To Net profit xxx
(Transferred to Capital A/c)
xxx xxx

st
Balance Sheet of Thiru............. as on 31 March, .............
Liabilities Rs. Rs. Assets Rs. Rs.
Capital xxx Cash in Hand xxx
Add: Net Profit (or) xxx Cash at Bank xxx
Less: Net Loss Sundry debtors xxx
xxx Less: Bad debts written off xxx
xxx
Less: Drawings xxx Less: Provision for Bad &
Interest on drawings xxx doubtful debts xxx
xxx xxx
xxx Less: Provision for discount
Less: Income Tax xxx on debtors xxx
xxx xxx
Sundry Creditors xxx Land and Buildings xxx
Less: Provision for Discount on Less: Depreciation xxx
Creditors xxx xxx
xxx Plant & Machinery xxx
Loan xxx Less: Depreciaton xxx xxx

21
Add: Interest on loan
outstanding xxx Furniture xxx
Less: Depreciation xxx
xxx xxx
Outstanding Expenses xxx
Incomes received in advance xxx Goodwill xxx
Less: Written off xxx
xxx
Closing stock xxx
Prepaid expenses xxx
Accrued Commission xxx
xxx xxx

Format of statement of affairs

Liabilities Rs. Assets Rs.

Sundry Creditors xxxx Cash in Hand xxxx
Bills Payable xxxx Cash at Bank xxxx
Outstanding Expenses xxxx Sundry Debtors xxxx
Bank Overdraft xxxx Bills Receivable xxxx
Capital (Balancing figure) xxxx Stock in trade xxxx
Prepaid Expenses xxxx
Fixed Assets xxxx
xxxx xxxx
Statement of Profit or Loss for the year________

Rs.
Closing Capital xxx
Add: Drawings xxx
xxx
Less: Additional capital introduced xxx
Adjusted closing capital xxx
Less: Opening capital xxx
Net Profit or loss for the year xxx
Note : If adjusted closing capital is more than opening capital = Profit

If adjusted closing capital is less than opening capital = Loss

Dr. Total Creditors Account Cr.

Particulars Amount Particulars Amount

Rs. Rs.
To Cash paid ……… By Balance b/d ………
To Discount Received ……… (Opening Balance)
By Credit Purchases ………
To Purchases Returns ……… (balancing figure)
To Balance c/d ………
(Closing Balance)
……… ………

Dr. Total Debtors Account Cr.

Particulars Amount Particulars Amount

Rs. Rs.
To Balance b/d (Op.Bal.) ……… By Cash received ………
To Creidt Sales (Bal.Fig.) ……… By Discount Allowed ………
By Sales Returns ………
By Balance c/d (Clo.Bal) ………
……… ………

Table showing summary of Accounting Ratios

S.No Description Formula Notes

of the ratio
1. Current ratio Current assets Current assets include Cash
Current liabilities in hand, cash at bank, Sundry
debtors, bills receivable, market-
able securities, stock And
prepaid expenses.

Current liabilities include Bank

overdraft, sundry creditors,
bills payable and Outstanding
expenses.
2. Liquid Ratio Liquid assets Liquid assets mean Current
Current liabilities assets less stock and Prepaid
expenses
3. Absolute Liquid Absolute Liquid assets Absolute Liquid assets Means
Ratio Liquid liabilities cash, bank and short Term
investment.

Liquid liabilities means Current

liabilities less bank overdraft.
4. Debt Equity Long Term Debts Long term debts Include
Ratio Debentures, long term Loans
Shareholders funds from banks and Financial
 institutions.

Shareholders funds include

Equity share capital, Preference
share capital, Reserves and
surplus.
5. Proprietory Shareholders funds Tangible assets include
Ratio Total tangible assets all assets except goodwill,
preliminary expenses etc.
6. Gross Profit Gross Profit × 100 Gross profit = Sales – Cost of
Ratio Sales goods sold.

Cost of goods sold = Opening

stock + Purchases – Closing
stock

Net sales = Total sales (cash &

credit) – Sales returns
7. Net Profit Ratio Net Profit × 100 Net profit = Gross profit –
(Administration, Selling and
Sales
distribution and financial
expenses expenses)
8. Operating Profit Operating Profit Operating profit = Net profit +
Ratio Sales × 100 Non-operating expenses – Non-
operating income [OR]

Gross profit – Operating

expenses
9. Operating Ratio Cost of goods sold +
Operating expenses × 100
Sales
10. Capital Turnover Sales Capital employed = Equity share
Ratio Capital Employed capital + Preference share
capital + reserves and surplus +
long term borrowed funds
11. Fixed Assets Sales Fixed assets = Fixed assets –
Turnover Ratio Fixed Depreciation
Assets
12. Stock Turnover Cost of goods sold Average stock = opening stock +
Ratio Average stock closing stock divided by two.
13. Debtors Average accounts receivable
Turnover Ratio is calculated by dividing the
opening balance of debtors
and bills receivable and closing
balance of debtors and bills
receivable by two.
14. Creditors Credit Purchases Average accounts payable
Turnover Ratio Average accounts is calculated by dividing the
opening balance of creditors
payable (Creditors +
and bills payable and closing
Bills payable)
balance of creditors and bills
payable by two.
 Cash Budget for the period ——————

Month 1 Month 2 Month 3

Particulars
Rs. Rs. Rs.
Opening Cash Balance
Add: Estimated cash receipts :
Cash sales
Cash receivable from customers
Business receipts like Interest, commission,
dividend etc
Sale of assets Loans borrowed
Proceeds from issue of shares / debentures

Total cash available during the month

Less: Estimated cash payments :

Cash purchases
Payable to suppliers
Business expenses – wages, office
expenses, selling expenses, etc
Business Payments – Interest paid,
income tax, dividend etc.
 Purchase of assets
Repayment of loans
Redemption of shares/debentures

Total cash payments during the month

Closing cash balance