Adjustment of Goods in Transit in Final Accounts (Financial Statements)

When the goods are sent or dispatched by the supplier but not received by the business till the end of the year, these goods are recorded as goods in transit. Adjustment needs to be done for all the goods that are in transit.

Adjustment:

A. If Goods in Transit is given outside the trial balance

In such case, two effects will take place:

• Will be shown on the Assets side of the Balance Sheet.
• Added to the Creditors A/c on the Liabilities side of the Balance Sheet.

B. If Goods in Transit is given inside the trial balance

In such a case, it will be shown only once on the Assets side of the Balance Sheet.

Illustration:

Following is the trial balance of Mr. Rajan.

Adjustments were noted:

1. Goods in transit costs ₹2,000.
2. Goods to be used in business amounting to ₹10,000.
3. The manager is entitled to commission @10% on net profit before charging such commission.
4. Out of the total Advertisement expenditure incurred, only ₹4,000 belongs to the current year.
5. Goods are sent to customers on a sale or return basis at cost plus 25% profit, the cost is ₹10,000.
6. Closing stock ₹4,500 to be taken into account.

Prepare Trading A/c, P & L A/c, and Balance sheet.

Solution:

Note: Contingent Liability will not be taken into account in the Balance sheet. It will be shown in Notes to Account.

Working Notes:

1. Calculation of Manager’s Commission

Manager’s Commission =