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