Financial Statement with Adjustment with Examples-III

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 adjustments, such as Depreciation, Appreciation, Bad Debts, Provision for Bad & Doubtful Debts, and Bad Debts Recovered are discussed below:

1. Depreciation:

Depreciation means a reduction in the value of assets which is a loss for the business. There are various causes of depreciation, like obsolescence, wear and tear, destruction, efflux of time, etc. All these factors influence the working life of assets and hence lead to a reduction in the value of assets over a period of time.

The following treatment takes place in respect of Depreciation:

A. If Depreciation is given outside the trial balance:

In such a situation, two effects will take place:

First, it will be shown in the Dr. side of the Profit & Loss A/c.
Second, the amount of fixed assets appearing in the Balance Sheet would reduce by the amount of depreciation.

B. If Depreciation is given Inside the trial balance:

In such a case, it will be shown only on the Dr. side of the Profit & Loss A/c.

2. Appreciation:

Appreciation refers to an increase in the value of assets over a period of time. This increase in the value of assets may take due to various factors, such as an increase in demand, an increase in interest rates, or when there is inflation in the economy.

The following treatment takes place in respect of Appreciation:

A. If Appreciation is given outside the trial balance:

In such a case, two effects will take place:

First, it will be shown in the Cr. side of the Profit & Loss A/c.
Second, the amount of fixed assets appearing in the Balance Sheet would increase by the amount of appreciation.

B. If Appreciation is given Inside the trial balance:

In such a case, it will be shown only on the Cr. side of the Profit & Loss A/c.

3. Bad Debts:

Every business makes cash and credit transactions in its day-to-day life. When the goods are sold on credit to any person or firm, we record them as debtors in books of account, and this shows that some amount is recoverable from them in the near future. When the business is unable to recover its payment for the goods given, bad debts take place, and this is a loss for the business, which is recorded in Trading and Profit & Loss A/c.

The following treatment takes place in respect of Bad Debts:

A. If Bad Debts are given outside the trial balance:

In such a case, two effects will take place:

First, bad debts will be shown in the Dr. side of the Profit & Loss A/c, being a loss for the business.
Second, the amount of debtors appearing in the Balance Sheet would be reduced by the amount of bad debts.

B. If Bad Debts are given Inside the trial balance:

In such a case, these will be shown only on the Dr. side of the Profit & Loss A/c.

4. Provision for Bad and Doubtful Debts:

Provision is created out of profits of the current accounting period to reduce the amount of loss that may take place in the future. A Provision for Bad and Doubtful Debts is created so that the debtors who are not able to make the payment of their liability on the due date has no major effect on the profits of the current year and the profits remain intact. This also helps to know the true picture of business following the principle of conservatism.

The following treatment takes place for Provision for Bad and Doubtful Debts:

A. If Provision for Bad & Doubtful Debts is given outside the trial balance:

In such case, two effects would take place:

First, it will be shown in the Dr. side of the Profit & Loss A/c.
Second, amount of Provision for Bad & Doubtful Debts will be deducted from the Debtors in the Assets side of the Balance Sheet.

B. If Provision for Bad & Doubtful Debts is given inside the trial balance:

In such a case, it will be shown only on the Dr. side of the Profit & Loss A/c.

5. Bad Debts Recovered:

Bad debts recovered means the amount that has been received from debtors who were written off as bad earlier in the books of account. These were written as bad because there was no scope of recovery from them. It is treated as an income for the business and recorded in the credit side of Profit and Loss A/c.

The following treatment takes place in respect of Bad Debts Recovered:

A. If Bad Debts Recovered is given outside the trial balance:

In such case, two effects would take place:

First, it will be shown in the Cr. side of the Profit & Loss A/c.
Second, the amount of cash would be increased by the amount of bad debts recovered in the Balance sheet.