Summarised Notes - Adjustments

Financial Statements with Adjustments
1) Closing Stock
Mentioned in the Trial Balance Given in the Adjustments – 2 Treatments
– Only 1 Treatment
Adjustment Entry Treatment in Trading/Profit Treatment in Balance sheet
Shown on the Assets side of the & Loss A/c
Balance Sheet Closing Stock A/c Dr. Credit side of Trading A/c Shown on the Assets side
To Trading A/c
Important: Closing Stock is valued at lower of Cost or Net Realizable value (NRV).
2) Outstanding Expenses
Shown on the Liabilities side of & Loss A/c
the Balance Sheet Expenses A/c Dr. Added to the respective Shown on the Liabilities side
To Outstanding Expense A/c expense on the debit side
3) Prepaid or Unexpired Expense

Balance Sheet Prepaid Expenses A/c Dr. Deducted from the respective Shown on the Assets side
To Expense A/c expense on the debit side.
4) Accrued Income
Balance Sheet Accrued Income A/c Dr. Added to the respective Shown on the Assets side
To Income A/c Income on the credit side.
5) Income Received in Advance or Unearned Income

Shown on the Liability side of & Loss A/c
the Balance Sheet Income A/c Dr. Deducted from the respective Shown on the Liability side
To Unearned Income A/c Income on the credit side.
6) Depreciation
1st Method: Depreciation Adjustment Entry Treatment in Trading/Profit Treatment in Balance sheet
amount is shown on the Debit & Loss A/c
side of the Profit & Loss A/c. st
1 Method: Depreciation is shown on the Depreciation amount is
Depreciation A/c Dr. Debit side of Profit & Loss deducted from the concerned
2nd Method: Depreciation To Machinery A/c A/c Asset
amount is shown on the debited 2nd Method: Depreciation is shown on the Total Balance of Accumulated
side of Profit & Loss A/c and Depreciation A/c Dr. Debit side of Profit & Loss Depreciation is deducted from
Accumulated Depreciation is To Accumulated Depreciation A/c the concerned Assets.
deducted from concerned Asset. A/c
7) Bad Debts
Mentioned in the Trial Balance Given in the Adjustments – Further Bad Debts - 2 Treatments
& Loss A/c
Shown on the Debit side of the Bad Debts A/c Dr. Added to the Bad debts Further Bad debts is shown as
Profit & Loss A/c To Debtors A/c balance (given in the Trial Deduction from the Debtors
balance) on the debit side of on the Assets side.
Profit & Loss A/c.
Important: Bad Debts given in the Trial Balance is not deducted from the Debtors in the Balance sheet.
8) Provision for Doubtful Debts
– OLD Provision
->Old Provision is used to Write & Loss A/c
off Bad debts of the current year Profit & Loss A/c Dr. Shown on the debit side of New Provision is shown as
To Provision for Doubtful Profit & Loss A/c. Deduction from the Debtors
-> The remaining Balance in the Debts A/c Amount is calculated as: on the Assets side.
old provision is deducted from Bad Debts + Further Bad
the New Provision amount. debts + New Provision – Old
Provision
Important: If amount calculated is coming as a Negative figure, then the provision for doubtful
debts is shown on the Credit side of Profit & Loss A/c.
9) Provision for Discount on Debtors

– OLD Provision
->Old Provision is used to Write & Loss A/c
off Discount Allowed expense. Profit & Loss A/c Dr. Shown on the debit side of New Provision is shown as
To Provision for Discount Profit & Loss A/c. Deduction from the Debtors
-> The remaining Balance in the on Debtors A/c Amount is calculated as: on the Assets side.
Old provision is deducted from Discount Allowed + New
the New Provision amount. Provision – Old Provision
Important: If amount calculated is coming as a Negative figure, then the provision for Discount on Debtors is shown on the
Credit side of Profit & Loss A/c.
-> It is calculated on the Debtors balance remaining after deducting Further Bad debts & New Provision for Doubtful debts.
10) Managers’ Commission
& Loss A/c
Shown on the Debit side of the Managers’ Commission A/c Shown on the debit side of Outstanding Managers’
Profit & Loss A/c Dr. Profit & Loss A/c commission is shown on the
To Outstanding Managers’ Liability side of Balance sheet.
Commission A/c
Calculation: 1) % of Net profit before charging such commission = Net profit before charging commission X Rate /100
2) % of Net profit after charging such commission = Net profit after charging such commission X (Rate /100+rate)
11) Interest on Capital

Shown on the Debit side of the & Loss A/c
Profit & Loss A/c Interest on Capital A/c Dr. Interest on capital is shown on Added to the Capital on the
To Capital A/c the debit side of Profit & Loss Liability side of Balance sheet.
A/c
12) Interest on Drawings
& Loss A/c
Shown on the Credit side of Drawings A/c Dr. Interest on Drawings is shown Added to the drawings and
the Profit & Loss A/c To Interest on Drawings A/c on the Credit side of Profit & then total drawings amount is
Loss A/c. deducted from the Capital on
the Liability side of Balance
sheet.
13) Goods distributed among Staff members for Staff Welfare

Profit & Loss A/c Staff Welfare Expenses A/c ->Deducted from Purchases No Treatment
Dr. ->Shown on the debit side of
To Purchases A/c Profit & Loss A/c
14) Drawings of Goods from Personal use
Deducted from the Capital in & Loss A/c
the Balance sheet. Drawings A/c Dr. Deducted from Purchases Deducted from the Capital in
To Purchases A/c the Balance sheet.
15) Goods distributed as Charity/Donation

Profit & Loss A/c Charity/Donation A/c Dr. ->Deducted from Purchases No Treatment
To Purchases A/c ->Shown on the debit side of
Profit & Loss A/c
16) Abnormal Losses of Stock
& Loss A/c
If NO Insurance ->Deducted from Purchases No Treatment
Shown on the Debit side of the Loss by Accident A/c Dr. ->Loss is shown on the debit
Profit & Loss A/c To Purchases A/c side of Profit & Loss A/c
In case of Insurance ->Total value of Loss is Insurance Claim is shown on
Loss by Accident A/c Dr. deducted from Purchases the Assets side of Balance
To Purchases A/c -> (Loss – Insurance Claim) is sheet.
debited to Profit & Loss A/c
17) Sale of Goods on Approval Basis

Given in the Adjustments – 2 Treatments
& Loss A/c
a) Sales A/c Dr. ->Deducted from Sales in the ->Deducted from the Debtors
To Debtors A/c Trading A/c in the Balance sheet
b) Closing Stock A/c Dr. ->Added to the Closing stock ->Added to the Closing stock
To Trading A/c in the Trading A/c on the Assets side.
18) Implied Adjustments
Sometimes you will be required to make adjustments although no direct information would be given in the question. These types of
hidden adjustments are called Implied adjustments.
For example: If any loan is given and interest rate is mentioned for it like 10% loan then you are required to check if the interest due
on loan for the complete financial year is debited to Interest on Loan A/c or not and if not, then you are required to pass adjustment
entry to show its effect in the financial statements.
Some of the Hidden Adjustments are explained below:
Trial Balance as on 31st March, 2021
Dr. Cr.
st
1 10% Loan from Pinku (Taken on 1 April,2020) 1,00,000
Explanation: Interest @ 10% on 1,00,000 will be debited to Profit & Loss A/c and
Outstanding Interest will be shown in the Liability side of Balance sheet.
2 Salaries (11 months) 99,000
Explanation: 1 month salary is not recorded so Rs. 9000 will be added to the salary expense
& Outstanding salary of Rs. 9000 will be shown on the liability side of Balance sheet.
3 Insurance premium (Annual insurance paid up to 30th June, 2021) 36,000
Explanation: Insurance premium for 3 months i.e. April 2021-June 2021 is paid in advance
so Rs. 9000 (36,000/12*3) will be deducted from the Insurance expense in the Profit &
Loss A/c and Prepaid insurance of Rs. 9000 will be shown in the Assets.

Summarised Notes - Adjustments

Uploaded by

Document Information

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Summarised Notes - Adjustments

Uploaded by

Copyright:

Available Formats

Financial Statements with Adjustments

3) Prepaid or Unexpired Expense

5) Income Received in Advance or Unearned Income

9) Provision for Discount on Debtors

11) Interest on Capital

13) Goods distributed among Staff members for Staff Welfare

15) Goods distributed as Charity/Donation

17) Sale of Goods on Approval Basis

You might also like