Final Accounts and Its adjustment for practice and clarity

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2. For Quick Revision of following topics, please see my presentation
‘Financial Statements of Sole Trader with Adjustments 1
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⚫ Meaning and Need of Adjustments
⚫ ImportantAdjustments:
⚫ Closing Stock
⚫ Outstanding Expenses
⚫ Prepaid or Unexpired Expenses
⚫ Accrued Income
⚫ Unearned Incomeor Income Received in Advance
⚫ Depreciation
⚫ Bad Debts
⚫ Provision for Bad and Doubtful Debts
⚫ Provision fordiscounton debtors

3. Learning Objectives:
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Accounting Treatmentof Adjustments:
⚫ Provision fordiscount on creditors
⚫ Intereston Capital
⚫ Intereston Drawings
⚫ Intereston Loan
⚫ Loss of goods by fire, theft, accidentsetc.
⚫ Goods withdrawn by proprietorforpersonal use
⚫ Goodsgiven ascharity
⚫ Goodsdistributed as freesample
⚫ Goods used in construction of a fixed assets
⚫ Goods sold on saleorreturn basis

4. Learning Objectives:
4
Accounting Treatmentof Adjustments:
⚫Loss of fixed assets
⚫Commission payable to manager
⚫Writing off deferred revenueexpenditure
⚫Errorsand omissions
⚫Otheradjustments

5. Provision for Discount on Creditors
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⚫This adjustment is not supported by Prudence
Principle.
⚫If it is given in the question, then it will be treated
accordingly.
⚫Calculation of provision for discount on creditors,
depends uponourpastexperience.
Adjustment Entry:
Provision for Discounton Creditors Dr.
To Profitand Loss A/c

6. Provision for Discount on Creditors
6
Treatment in Final Accounts:
1. It is shown on thecredit side of Profitand Loss A/c.
2. It isdeducted from creditors on the liabilities side of
Balance Sheet.
⚫Net amount credited to Profit and Loss Account may
also becalculated with the helpof following equation:
Discount received + Provision to be maintained -
Provision given in the trial balance

7. Provision for Discount on Creditors - Example
7
⚫Make a provision fordiscounton creditors @3%.
Informationgiven in trial balance
Dr. (Rs.) Cr. (Rs.)
80,000
4,500
Creditors
Provision fordiscount on creditors 4,000
Discount received
Solution
⚫Amount to be shown in P & L A/c = Discount received +
Provision to be maintained - Provision given in the trial
balance
⚫ = 4,500 + 2,400 – 4,000 = 2,900

8. Profit and Loss Account
Particulars Rs. Particulars Rs.
By Discount Received 4,500
Add: New Prov. For Discount on
creditors 2,400
Less: Existing Provision - 4.000 2,900
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Balance Sheet
Liabilities Rs. Assets Rs.
Creditors 80,000
Less: Prov. for
discount to be
received
2,400 77,600

9. Interest on Capital
9
⚫Adjustment Entry:
Intereston Capital A/c Dr.
To Capital A/c
⚫Treatment in the final accounts:
i. It is shown on thedebitsideof Profitand Loss A/c.
ii. It is added tocapital on the liabilities side of Balance
Sheet.

10. Interest on Drawings
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⚫Adjustment Entry:
Capital A/c Dr.
To Intereston Drawings A/c
⚫Treatment in the final accounts:
i. It is shown on thecredit side of Profitand Loss A/c.
ii. It is deducted from capital on the liabilitiessideof
Balance Sheet.

11. Outstanding Interest on Loan Borrowed
11
⚫Adjustment Entry:
Intereston Loan A/c Dr.
To Outstanding InterestA/c
⚫Treatment in the final accounts:
i. It isadded to intereston loan oras a separate item
on thedebitsideof Profitand Loss Account.
ii. It is added to loan orshown as a separate itemon the
liabilities side of Balance Sheet.

12. Interest on Loan Borrowed
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⚫Implied or hidden adjustment. If a loan account
carrying certain rate of interest is given on the credit
side of the trial balance, then it is essential to calculate
interest at the rate mentioned and check whether full
interest has been paid or not. If not, then adjustment
should be made for outstanding interest on loan, as
mentioned above.

13. Interest on Loan Borrowed - Example
13
Makeadjustments from the informationgiven below.
Dr. (Rs.) Cr. (Rs.)
Loan @ 15% p.a. 1,00,000
Interest on loan 9,000
Capital 60,000
Drawings 12,000
Solution
1. Allow intereston capital @ 12%.
2. Charge interest on drawings @ 8%.
⚫Outstanding interest on loan is Rs. 6,000 (15,000 - 9,000).

14. Profit and Loss Account
Dr. Cr.
Particulars Rs. Particulars Rs.
To Interest on Loan 9,000 By Interest on Drawings 960
Add: O/S Interest 6,000 15,000
To Interest on Capital 7,200
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15. Balance Sheet
Liabilities Rs. Assets Rs.
Capital 60,000
Less: Drawings (12,000)
Add: Interest on Cap. 7,200
Less: Interest on (960)
Drawings 54,240
Loan 1,00,000
Add: Interest O/S 6,000 1,06,000
15

16. Loss of goods by fire, theft, accident etc.
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(i)
(ii)
For gross loss of goods:
Abnormal Loss of Goods A/c Dr.
To Purchases/Trading A/c
(Being loss of goods recorded)
For insurance claim accepted:
Insurance Claim A/c Dr.
To Abnormal Loss of Goods A/c
(Being insuranceclaim accepted by the insuranceco.)
(iii) For net loss of goods, i.e., gross loss minus insurance
claim accepted:
Profitand Loss A/c Dr.
To Abnormal Loss of Goods A/c
(Being net lossof goods transferred to Profitand Loss A/c)

17. Loss of goods by fire, theft, accidents etc.
17
Direct Entry
In placeof above threeentries, following entry mayalso
be passed if abnormal loss account is not shown in
books:
Insurance Claim A/c
Profitand Loss A/c
Dr.
Dr.
To Purchases/Trading A/c
(Being insuranceclaimand lossof goods recorded)

18. Loss of goods by fire, theft, accidents etc.
18
Treatment in Final Accounts:
1) Cost of goods lost/destroyed is either deducted from
purchases or shown on the credit side of Trading
A/c.
2) Net Loss, i.e., gross loss less insurance claim
accepted, if any, shall be shown on the debit side of
Profitand Loss A/c.
3) Insurance claim accepted will be shown on the assets
sideof Balance Sheet.

19. Goods withdrawn by proprietor for personal use
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Dr.
⚫Adjustment Entry:
Drawings A/c
To Purchases A/c
⚫Treatment in the final accounts:
i. It is deducted from the purchaseson thedebitside
of Trading Account.
ii. It is deducted from thecapital on the liabilitiesside
of balance Sheetas drawings.

20. Goods given as Charity
20
⚫Adjustment Entry:
Charity A/c Dr.
To Purchases A/c
(Being goodsgiven as charity)
⚫Treatment in the final accounts:
i. The cost of goods given as charity shall be deducted
from the purchases on thedebitside of Trading A/c.
ii. It is shownon thedebitsideof Profitand Loss A/c.

21. Goods distributed as free sample
21
Dr.
⚫Adjustment Entry:
Free SamplesorAdvertising A/c
To Purchases A/c
(Being goodsgiven as charity)
⚫Treatment in the final accounts:
i. The costof goodsgiven as free sample is deducted
from purchases in the Trading Account.
ii. It is shownon thedebitsideof Profitand Loss
Accountas it is an expense for the business.

22. Goods used in construction of a fixed assets
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⚫Adjustment Entry:
Building A/c Dr. (costof goods)
To Purchases A/c
(Being goods used in constructionof building)
⚫Treatment in the final accounts:
i. Thecostof goods used in constructionof building is
deducted from purchases in Trading Account.
ii. Add to Building in the Balance Sheet.

23. Goods used in construction of a fixed assets
23
⚫Example: A firm dealing in iron and steel items, used
some steels and iron worth Rs. 10,000 in construction of
building.
⚫Adjustment Entry:
Building A/c Dr. (cost of goods)
To Purchases A/c
(Being goods used in construction of building)
⚫Treatment in the final accounts:
i. Thecost of goods used in construction of building is
deducted from purchases in Trading Account.
ii. Add to Building in the Balance Sheet.

24. Goods sold on sale or return basis or
Sale of goods on approval basis
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⚫AdjustmentEntries:
a)
b)
Sales A/c Dr. (Sale priceof goods)
To Debtors A/c
(Being goodssold on approval basis, but notyet
confirmed adjusted)
Closing Stock (with customers) A/c Dr.
To Trading A/c
(Being stockwith customers recorded)

25. Goods sold on sale or return basis or
Sale of goods on approval basis
25
⚫Treatment in the final accounts:
i. Sales amount is deducted from sales in Trading
Accountand from debtors in the Balance Sheet.
ii. Costof such goods is added toclosing stock shown
on the credit side of the Trading Account and the
assets sideof Balance Sheet.

26. Goods sold on sale or return basis - Example
26
⚫Goods priced Rs. 10,000 was sold on sale or return
basis. Confirmation not received. Sale price includes a
profit of 20%.
⚫Treatment in the final accounts:
i. Salesamount (Rs. 10,000) shall bededucted from
sales in Trading A/cand from debtors in the B/S.
ii. Cost of such goods Rs. 8,000 shall be added to
closing stock shown on thecredit sideof the Trading
A/cand theassets side of B/S.

27. Loss of Fixed Asset
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Adjustment Entry:
Insurance Claim A/c
Profitand Loss A/c
Dr. (Claimaccepted)
Dr. (Net Loss)
To Fixed AssetsA/c (Gross Loss)
(Being lossof fixed and insuranceclaim recorded)

28. Loss of Fixed Asset
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Treatment in Final Accounts:
i. Net lossof fixed assets is shown on thedebitside of
Profitand Loss Account.
ii. Insuranceclaim accepted is shownon theassets side
of Balance Sheetasa separate item.
iii. Valueof fixed assetsdestroyed is deducted from the
respectiveasseton theassets sideof Balance Sheet.

29. Loss of Fixed Asset - Example
29
Information from Trial Balanceason 31 March, 20x1
Furniture Rs. 50,000
Adjustment:
i. Furniture having a book value (at the beginning of
theyear) of Rs. 10,000 wasdestroyed by fire on the
last week of March and insurance company has
accepted a claim of Rs. 3,400.
ii. Companycharges depreciationon furniture @10%
on written downvalue method.

30. Solution
30
Treatment in Final Accounts:
i. Gross Loss = 10,000 – 1,000 (Dep.) = 9,000. Itwill be
deducted from the Furnitureon theassets side of
Balance Sheet.
ii. Net loss of fixed assets Rs. 5,400 (9,000 – 3,400) will
be shown on thedebitsideof Profitand Loss A/c.
iii. Insurance claim accepted Rs. 3,400 will be shown on
the assets side of Balance Sheet as ‘Insurance Claim’
in CurrentAssets.

31. Manager’s Commission Payable on Profits
Calculationof Commission
100
ii. When commission is payableon net profitafter
charging such commission:
i. When commission is payableon net profit before
charging such commission:
Commission = Net Profits before Commission
Rate
Rate
31
100 Rate
Commission = Net Profits before Commission

32. Manager’s Commission Payable on Profits
32
Adjustmententry:
Profit & Loss A/c Dr.
To Commission Payable A/c
(Being commission payable to manager)
Treatment in Final Accounts:
i. Itwill be shown on thedebitsideof Profit & Loss
accountand
ii. Shown as a separate item on the liabilities sideof
Balance Sheet.

33. Manager’s Commission Payable on Profits
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Example: A firm’s net profit beforecharging manager’s
commission is Rs. 55,000.
Calculate the manager’s commission and net profit, if rateof
commission is –
(a) 10% on net profits beforecharging such commission, and
(b) 10% on net profitsaftercharging such commission.

34. Manager’s Commission Payable on Profits
Calculationof Commission
a) When commission is payableon net profit before
charging such commission:
Commission = Net Profit beforecommission
𝑅𝑎𝑡
𝑒
100
Commission = 55,000
10
34
100
= Rs. 5,500

35. Manager’s Commission Payable on Profits
Calculationof Commission
b) When commission is payableon net profit before
charging such commission:
Commission = Net Profit beforecommission
𝑅𝑎𝑡
𝑒
100+𝑅𝑎𝑡𝑒
Commission = 55,000
10
35
100+5
= Rs. 5,000

36. Write off deferred revenue expenditure
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⚫Deferred revenue expenditures are those expenditures
which are revenue in nature but these benefit for more
than oneyear.
⚫According to matching concept, the whole of such
expenditure can not be charged to P and L A/c of the
year in which it has been incurred as its benefits are
derived over a number of years. An appropriate part of
it should bewritten off bydebiting to P and L A/c .
Example. Rs. 30,000 have been spent by a firm on
advertisement campaign to launch a new product. It is
estimated that its benefit will last for 3 years.

37. Write off deferred revenue expenditure
37
10,000
Adjustment Entry:
Profit & Loss A/c Dr. 10,000
To Deferred Advertisement Exp. A/c
(Being Deferred Advertisement Exp. written off )
Treatment in final accounts:
i. Theamountwritten off (Rs. 10,000) will be shown on the
debit side of the Profit and Loss Account.
ii. The unwritten off amount (Rs. 20,000) will be shown on
theassets sideof the Balance Sheet.

38. Errors and Omissions
38
⚫Goods sold and dispatched but omitted to be
recorded.
It will beadded to sales in the Trading Account and also be
added to thedebtors on theassets side of Balance Sheet.
Note: It is to be noted that such amount should also be
considered for the purposeof calculating provision for bad
debts.

39. Errors and Omissions
39
⚫Goods purchased and included into stock but
omitted to be recorded.
Adjustment Entry:
Purchases A/c Dr.
To Creditors (Individual) A/c
Treatment in Final Accounts:
It will beadded to purchases in the Trading Account and
also be added to the creditors on the liabilities side of
Balance Sheet.
Note: It is to be noted that for the purpose of calculating
provision for discount on creditors, such amount should
also beconsidered

40. Errors and Omissions
40
⚫Capital expenditure wrongly treated as revenue
expenditure. Deduct the amount from revenue
expenditure in the Trading/Profit and Loss Account
and add to the respective asset on the assets side of
Balance Sheet.
⚫Note: It is to be noted that depreciation should be
charged on increased valueof such asset.

41. Errors and Omissions
41
Capital expenditure wrongly treated as revenue
expenditure.
⚫Example: Balances in trial balance:
Cr.
Machineryand equipments
Repairs
Dr.
72,000
15,000
⚫An equipmentpurchases for Rs. 8,000 has been
debited to Repairs A/c.
⚫Chargedepreciation@10% on machinery and
equipments.

42. Errors and Omissions
42
⚫Revenue expenditure wrongly treated as capital
expenditure. Add the amount to the revenue expenses in
the Trading/Profit and Loss Account and deduct from the
asset wrongly charged, on the assets side of Balance Sheet.
It is to noted that depreciation should be charged on the
reduced valueof such asset.
⚫Example: Balances in trial balance:
Dr. Cr.
Building 82,000
Wages 15,000
⚫Wages (Rs. 3,000) paid forconstruction of building has
been debited towages account.

43. Errors and Omissions
43
⚫Remuneration paid to an employee was debited to
his personal account. It will be added to salaries on
the debit side of Profit and Loss Account, and also
deducted from debtors on the assets side of Balance
Sheet.
⚫Example: Balances in trial balance:
Dr. Cr.
Salaries 12,000
Mr. X 2,000
⚫Salaries paid to Mr. X has been debited to his personal
A/c

44. Other adjustments
44
A person has a debit balance as debtors and also a
credit balance as creditor.
⚫In this case, lower of the two balances shall be
deducted from debtors as well as from creditors.
⚫It is to be noted that provision for bad debts shall be
created on the reduced debtors.

45. Example
45
⚫Information froma Trial Balance
⚫Sundry Debtors Rs. 29,000
⚫Sundry Creditors Rs. 14,800
⚫Mr. Harish is included in debtors for Rs. 3,000 and also
in creditors for Rs. 2,000.
Solution:
⚫Deduct Rs. 2,000 (lowerof the two) from Debtorsas
well Creditors.
⚫Any adjustment for provision for Bad debts and
discountshall be madeon the balanceof debtorsand
creditors, i.e., Rs. 27,000 and 12,800 respectively.

46. THANKS
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