Adjustment of Goods given as Charity or Free Sample in Final Accounts (Financial Statements)

Sometimes Goods are given as charity or free sample. Adjustment of goods given away as Charity or Free Sample while preparing financial statements is important for the business. In such a case, the following effects will take place:

Adjustment

A. If  Charity/Free Sample is given outside the trial balance: 

In such case, two entries will take place:

• On the Dr. side of the Profit & Loss A/c.
• Amount of Goods given as Charity/Free Sample will be deducted from Purchases A/c in the Trading A/c.

B. If Charity/Free Sample is given inside the trial balance:

If the goods are given away as charity/ free samples, then these are recorded only once in the Dr. side of the Profit & Loss A/c.

Illustration:

Following are some of the balances that appear in the books of Mr Haider.

The following adjustments have to be made:

1. Further bad debts amount to ₹2,500, Provision for Bad debts to be made at 5%, Provision for Discount to debtors @2%.

2. Goods are given away as charity amounting to ₹10,000.

3. Goods drawn for personal use ₹5,000.

4. Goods amounting to ₹15,000 were destroyed by fire and the insurance company admitted the claim for only ₹10,000.

5. Closing Stock amounts to ₹10,000

Solution: