1 of 20

FINANCIAL STATEMENT WITH ADJUSTMENTS

MEANING OF ADJUSTMENT ENTRIES :Those entries which need to be passed at the end of the accounting year to show the accurate profit or loss and fair financial position of the business

2 of 20

NEED OF ADJUSTMENTS

To ascertain the true Net Profit or loss of the business.
To ascertain the true financial position of the business.
To make a record of the transactions omitted from the books.
To rectify the errors committed in the books of the accounts.
To make a record of such income/ expenses which have been accrued but not received/ paid.
To provide for depreciation and other provisions.

3 of 20

Important adjustments

(i) Closing Stock Amt of goods unsold at the end of the year. It is valued at Cost Price or Market Price which ever is less.
Treatment in Final Accounts-
Shown in trading account credit side and on the Assets side in the Balance sheet.
(ii) Outstanding Expenses or Expenses due but not paid.
Treatment in Final Accounts-
Outstanding expenses on the one hand will be added to the concerned expenses on the debit side of Trading or Profit and loss account and on the other hand will be shown in the liability side of Balance Sheet.

4 of 20

(iii) Accrued income or income receivable: Income earned but not received during the current year.
Treatment in Final Accounts: Such income on the one hand will be shown on the credit side of Profit and loss account and on the other hand on the assets side of the Balance Sheet.
(iv)Prepaid Expenses or unexpired expenses: Expenses which have been paid in advance for the next year.
Treatment in Final Accounts: Will be subtracted from concerned expense in Trading or Profit and loss account and as an asset in the Balance Sheet.

5 of 20

(v) Unearned income or income received in advance: portion of the income received during current year which belongs to next year.
Treatment in Final Accounts: Will be subtracted from concerned income in profit and loss account and shown as a liability in Balance Sheet.
(vi) Depreciation
Treatment in Final Accounts: depreciation will be shown on the debit side of profit and loss account and will be subtracted from concerned asset in the Balance Sheet.

6 of 20

(vii) Interest on capital
Treatment in final accounts: Interest on capital is an expense for the business and hence is shown in profit and loss account debit side and added to the capital in the balance sheet.
(viii) Bad debts: It is a loss for the business ,hence shown in profit and loss account.If given in the adjustment they will be shown at one more place i.e deducted from debtors on the assets side of the Balance Sheet.

7 of 20

Example for bad debt adjustment

Extract of Trial Balance
as at 31^st March 2020

AdjustmenWrite off further bad debts Rs 10,000t entry:

	Dr Amt	Cr Amt
Bad debts Debtors	8000 2,00,000

8 of 20

Solution

Profit and loss account

Particulars	Rs.	Particulars	Rs.
To Bad Debts 8,000
Add Further Bad-Debts 10,000	18,000

Liabilities	Amount	Assets	Amount
		Debtors 2,00,000
		Less : Bad Debts 10,000	1,90,000

Balance Sheet

9 of 20

(ix) Provision for Bad and Doubtful Debts:- Provision created to cover any possible loss on account of bad debt likely to occur in future.

This provision is shown on the debit side of profit & loss account and deducted from debtors on the asset side of the balance sheet.

Example:- EXTRACT OF TRIAL BALANCE

as at 31^st March,2020

Adjustment:-Create a povision for Bad and Doubtful Debts@5% on Debtors.

	Dr.(Rs.)	Cr.(Rs.)
Debtors	60,000

10 of 20

Solution:

Adjustment Entry:
Profit and Loss A/c dr 3,000
To Provision for bad debts 3,000
Profit and loss A/c

Balance Sheet as at 31^st March

Particulars	Rs.	Particulars	Rs
To provision for Bad Debts	3,000

Liabilities	Amount	Assets	Amount
		Debtors 60,000
		Less:Provision for Bad Debt 3,000	57,000

11 of 20

Example:-When further Bad Debts and provision for bad debts is given in adjustment

The following balance appeared in the Trial Balance as at 31^st March 2020:

Sundry Debtors Rs.3,05,000.

Bad Debtors Rs.5,000

Provision for Bad-Debtors Rs.20,000

The partners of the firm agreed to record the following adjustments in the books of the firm.Further Bad-Debts Rs.3,000;maintain provision for Bad-Debts 10%

12 of 20

JOURNAL ENTRIES

DATE	PARTICULARS	L.F.	Dr.(Rs.)	Cr.(Rs.)
2016
March.31	Bad-Debts A/c Dr.		3,000
	To Sundry Debtors A/c			3,000
	(Further Bad-Debts)
March.31	Provision for Doubtful Debts A/c Dr.		8,000
	To Bad-Debts A/c			8,000
	(Bad Debts adjusted against the provision)
March.31	Profit and Loss A/c Dr.		18,200
	To Provision for Doubtful Debts A/c			18,200
	(Net amount charged from P&L A/c)

13 of 20

Note: (1) Net Amount chargeable from P & L A/c;-- Rs

Bad-Debts (5,000+3,000) 8,000

Add: New Provision : 10% on(3,05,000-3,000) 30,200

38,200

Less : Old Provision 20,000

18,200

14 of 20

PROFIT & LOSS ACCOUNT

Particulars	Rs	Particulars	Rs
To Provision for Doubtful Debts A/c:
Bad-Debts 5,000
Add: Further Bad-Debts 3,000
8,000
Add: New Provision 30,200
38,200 Less: Old Provision 20,200	18,200

15 of 20

BALANCE SHEET� as at March 31,2020

Liabilities	Amount	Assets	Amount(Rs)
		Sundry Debtors 3,05,000
		Less:Further Bad-Debts 3,000
		3,02,000
		Less:New Provision
		(10% on 3,02,000) 30,200	2,71,800

16 of 20

(x) Provision for discount on debtors:It is an expense of the business for receiving prompt payment.It is shown on the debit side of the profit & loss A/c. & also deducted from debtors on the asset side of the balance sheet.
Example : EXTRACTS OF TRIAL BALANCE

as at 31^st March,2020

Adjustments(i)Write off further bad debts Rs.2,000.(ii)Provision of bad debts is to be maintained at 5% on dedtors.(iii)Create a provision for discount on debtors at 3%.

Particulars	Dr.(Rs.)	Cr.(Rs.)
Bad-Debts	3,600
Provision for Bad & Doubtful Debts		7,500
Debtors	2,00,000

17 of 20

PROFIT & LOSS A/C

Particulars	Rs	Particulars	Rs
To Provision for Doubtful Debts A/c:
Bad-Debts 3,600
Add: Further Bad-Debts 2,000
5,600
Add: New Provision (5% on 1,98,000 i.e.2,00,000-2,000) 9,900
15,500 Less: Old Provision 7,500 To Provision for Discount (3% on 1,88,100 i.e. 1,98,000-9,900)	8,000 5,643

18 of 20

BALANCE SHEET� as at March 31,2020

Liabilities	Amount	Assets	Amount(Rs)
		Sundry Debtors 2,00,000
		Less:Further Bad-Debts 2,000
		1,98,000
		Less:New Provision
		5% on 1,98,000) 9,900
		1,88,100 Less:Provision for Discount 5,643

19 of 20

��(xi) Goods taken by proprietor for personal use : It will be treated as his drawings.�Treatments in final A/c-it will be deducted from purchases in the trading A/c & from capital on the liability side of the balance sheets as drawings.��(xii)Interest on drawings:It is income for the business & hence shown in credit side of profit & loss A/c & added to drawings & then deducted from Capital.��(xiii)Manager Commission on net profit : This is calculated at the end of the Accounting period,It is treated as outstanding expense.��Treatment in final A/c: Shown on Debit side of profit & loss A/c & on the liability side as an outstanding expense�

20 of 20

�� Methods of Calculating Manager”s Commission��1.On net profit before charging such commission�Manager commission=Net profit*rate of commission/100�2.On net profit after charging such commission.�Manager commission=Net profit*rate of commission/100+rate of commission.�Suppose the profit earned by the firm before allowing managers commission is Rs.22,000 & the manger is entitled to a commission of 10% on net profit after charging the commission,the commission will be calculated as follows:��Managers Commission=22,000*10/110=Rs.2,000