Financial Statement with Adjustment with Examples-I

Last Updated : 23 Jun, 2023

Through adjustments in the financial statement, we consider all the accounting items which are relevant to the current financial year, but not recorded in the books due to any reason or wrongly recorded. This helps us in getting the actual profit or loss for the year and the accurate financial position of the company. Five basic adjustments, like Closing Stock, Outstanding Expenses, Prepaid Expenses, Accrued Income, and Unearned Income are discussed below.

1. Closing Stock:

Value of unsold goods at the end of an accounting period is recorded as closing or ending stock. The valuation of closing stock is reckoned on the base of its cost price or the realisable value, whichever is lower.

Adjustment:

A. If Closing Stock is given outside the trial balance: Usually, closing stock is given outside the trial balance. In such case, two entries are passed:

In the Cr. side of the Trading A/c.
In the Assets side of the Balance Sheet.

B. If Closing Stock is given inside the trial balance: If Closing Stock is given in the trial balance, then it will be recorded only once on the Assets side of the Balance Sheet.

2. Outstanding Expenses:

Outstanding expenses refer to those expenses which relate to the current accounting period but have not been paid so far. These expenses lead to an increase in liability for a firm. Some of the types of these expenses are Outstanding wages, Outstanding salaries, Outstanding Interest on loan, etc. All these expenses have to be taken into account for computing the current Profit/Loss of a firm. These are debited to Profit and Loss A/c under their respective accounts.

Adjustment:

A. If Outstanding Expense is given outside the trial balance: In such case, two entries will be passed:

Will be added in the concerned item (expense) at the Dr. side of Trading A/c or Profit & Loss A/c.
Will be shown on the liabilities side of the balance sheet.

B. If Outstanding Expense is given inside the trial balance: It will be only shown on the liabilities side of the Balance Sheet. (Because it is a Representative Personal A/c, which has a Cr. balance)

3. Prepaid Expenses:

Prepaid expenses refer to those expenses which are paid in advance by the firm but the benefit of which are availed in the next accounting period. So, these expenses have to be adjusted, which have not been incurred in the current accounting period to know the true figure of Profit/ Loss.

Adjustment:

A. If Prepaid Expenses are given outside the trial balance: In such case, two entries will be passed:

Will be deducted from the related Expenses A/c in the Dr. side of the Trading A/c or Profit & Loss A/c
Will be shown in the Assets side of the Balance Sheet ( Because it is a Representative Personal A/c the benefit of which will be received in the next year)

B. If Prepaid Expenses are given inside the trial balance: It will only be shown on the Assets side of the Balance Sheet. (Because it is a Representative Personal A/c and has a Dr. balance)

4. Accrued Income:

Accrued income refers to those incomes which have been earned by the firm in the current accounting period but have not been received yet. Such types of income can be Interest on loan, rent received, commission, etc. So, following the accrual concept of accounting, these incomes are recorded in the year in which they are rendered by the firm and treated as an income for the firm.

Adjustment:

A. If Accrued Income is given outside the trial balance: In such case, two entries will be passed:

Will be added to the related Income A/c in the Cr. side of Profit & Loss A/c.
Will be shown in the Assets side of the Balance Sheet or added to the concerned source in the Assets side of the Balance Sheet.