Adjusting Entries

All revenue and expenditure accounts are transferred to

profit and loss (P&L) account and all assets, liabilities and
capital account re transferred to balance sheet. The final
accounts are prepared from the trial balance.
Trial balance does not include the information concerned
with pending transactions. To ensure that the final accounts
disclose the true results, it is necessary to consider all those
incomes and expenditures, which relates to the given period,
irrespective of the fact whether they have been received or
not, paid or not. Therefore, all outstanding expense and
outstanding incomes are adjusted at the time of the
preparation of final accounts. The process is done through
journal entries called “Adjusting entries”.

Q1: pass the necessary adjusting entries for the following:

1. Closing inventory Rs. 10,000
2. Prepaid / unexpired insurance Rs. 1,500
3. Outstanding (due but not paid) salary Rs. 3000
4. Depreciate plant by Rs. 1000
5. Interest accrued on investment Rs. 500
6. Commission received in advance Rs. 1000
7. Rs. 500 due from Mr. Nawaz a customer, proved
irrecoverable owing to his bankruptcy
8. Allowance for bad debt is to be made @10% on account
receivable which was Rs. 20,000
9. Provide interest on capital Rs. 1000
Solution:
No. Particular Ref Debit Credit
.
1 Inventory (closing) 10,000
P&L A/c 10,000
(to adjust closing
inventory)
2 Prepaid Insurance 1,500
Insurance 1,500
expense
(to adjust prepaid
insurance)
3 Salaries expenses 3,000
Salaries payable 3,000
(to adjust outstanding
salary)
4 Depreciation expense 1,000
Allowances for 1,000
depreciation
(to adjust depreciation
on plant)
5 Interest receivable 5,00
Interest income 5,00
(To adjust interest
accrued on investment)
6 Commission income 1,000
Unearned 1,000
commission
(to adjust commission
 received in advance)
7 Bad debt expense 5,00
A/c 5,00
receivable (Nawaz)
(to adjust bad debts
written off)
8 Bad debt expense 2,000
allowances for bad 2,000
debts (20,000 x 10%)
(to adjust allowances
for bad debt)
9 Interest on capital 1,000
Capital 1,000
(to adjust interest on
capital)

Q2. Following is the trial balance of Saqib & co. on December

31, 2003:
Debit Credit
Cash 40,000
A/c receivable 60,000
allowances for doubtful debts 1,000
Merchandise inventory 40,000
Prepaid salaries 12,000
Equipment 80,000
allowances for dep. (equipment) 5,000
a/c payable 20,000
Ali’s capital 100000
Commission income 20,000
Sales 428,000
Cost of goods sold 246,000
Salaries expense 66,000
Office supplies expense 10,000
Rent expense 12,800
Insurance expense 7,200
574,000 574,000

Give adjusting entries of the following information

considering each case separately. Also mention what amount
of each case should be reported in the income statement and
balance sheet.
1. If salaries expense for the year was Rs. 3,600
2. If prepaid salaries on December 31, 2003 were Rs. 8000
3. If salaries payable on December 31, 2003 were Rs. 4500

Solution:
1. If salaries expense for the year was Rs. 3,600
General Journal Entry
No. Particular Ref. Debit Credit
2003 prepaid salaries 62,400
Dec. salaries expense 62,400
31 (66000 3,600)
(to adjust prepaid
salaries)

Reported Amount:
Salaries expense in income statement Rs. 3,600
Prepaid salaries in the balance sheet (12,000 62,400) =
Rs. 74,400

2. If prepaid salaries on December 31, 2003 were Rs. 8000

General Journal Entry

No. Particular Ref. Debit Credit
1 salaries expense 4,000
prepaid salaries 4,000
(12,000 8,000)
(to adjust prepaid
salaries)

Reported Amount:
Salaries expense on income statement (66,000 4,000) =
Rs. 70,000
Prepaid salaries in the balance sheet = Rs. 4,000

3. If salaries payable on December 31, 2003 were Rs. 4500

General Journal Entry
No. Particular Ref Debit Credit
.
2003 Salaries expense 4,500
Dec. Salaries payable 4,500
31 (to adjust salaries
payable)

Reported Amount:
Salaries expense on income statement (66,000 4,500) =
Rs. 70,500
Prepaid salaries in the balance sheet = Rs. 12,000
Salaries payable in the balance sheet = 4,500

Q2: pass the necessary adjusting entries for the following,

business closes on Dec 31, 2003:
1. Insurance premium has been paid to March 31, 2004
@Rs. 18,00 p.a. initially recorded as an expense.
2. Interest on investment @10% p.a. becomes due for 6
months, face value of investment is Rs. 20,000
3. Closing inventory Rs. 3,000
4. Goods valued Rs. 5,000 were destroyed by fire, not
recovered by insurance.
5. Goods valued Rs. 10,000 were destroyed by fire, but
insurance company admitted only 50% of the claim.
6. Goods valued Rs. 5000 were destroyed by fire, but
insurance company admitted the claim in full.

Solution:
No. Particular Ref. Debit Credit
1 Prepaid insurance (1800 450
x (3/12)
Insurance expense 450
(to adjust prepaid
insurance)
2 Interest receivable 1000
Interest income 1000
(20,000 x 10% x (6/12))
(to adjust 6 month
interest income)
3 Closing entry 3000
P & L a/c 3000
4 P & L a/c (loss on fire) 5000
Inventory 5000
(destroyed by fire)
(to adjust inventory
destroyed by fire)
5 Insurance claim 5000
receivable (10,000 x
50%)
P & L a/c 5000
Inventory 10,000
(to adjust inventory
destroyed by fire and
insurance claim)
6 Insurance claim 5000
receivable
Inventory 5000
(to adjust inventory
destroyed by fire and
insurance claim)
Review of general journal entries:
1. Started business with capital Rs. 70,500
2. Paid cash to Mr. A Rs. 300
3. Received cash for interest on investment for Rs. 1500
4. Paid cash for rent Rs. 2000
5. Purchased furniture for office Rs. 25000
6. Purchase office supplies Rs. 2500

ABC company
General Journal
For the period ended Dec 31, 2003
date description Ref debit credit
.
1 Cash 70,500
Capital
(to record capital invested
by owner)
2 (Mr. A) 300
Cash 300
(to record cash paid to Mr.
A)
3 Cash 1500
Interest income 1500
(to record interest income
received)
4 Rent expense 2000
cash 2000
5 Furniture 25000
 cash 25000
6 Office supplies 2500
Cash/account payable 2500