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Financial Statement with Adjustments ( Journal Entries )

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Effect of Adjustment

Before we start seeing all the adjustments one by one, some matters must be considered at the time of adjustment:

  • Accounting for items mentioned in the trial balance will be carried out only once i.e. in one account only whether in the Trading A/c, Profit and Loss A/c, or Balance Sheet.
  • Accounting for items given outside the trial balance in adjustments will be carried out twice or at two places or two accounts.

Now we will see all the adjustments one by one:

1. Closing Stock

The number of goods that remain unsold at the end of the financial year is called closing stock. It is valued at cost price or market price whichever is less. 

Journal Entry:

 

                                             

Adjustment:

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.

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 in the Assets side of the Balance Sheet.

2. Outstanding Expenses

Outstanding expenses are those expenses that are related to the same accounting period of which accounts are being made but are not yet paid.

 Journal Entry:

 

Adjustment:

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 in the liabilities side of the balance sheet.

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

Such expenses which are concerned with the next financial year but have been paid in the current year are called prepaid expenses. 

 Journal Entry: 

 

                      

Adjustment:

If Prepaid Expenses is 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)

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

4. Accrued Income

Such an income that has been earned but not yet received in the current financial year is called Accrued Income.

 Journal Entry: 

 

 

Adjustment:

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.

If Accrued Income is given inside the trial balance: It will only be shown on the Assets side of the Balance Sheet.

5. Unearned Income

Such an income that has not been earned as yet but has been received in advance is called Unearned Income.

 Journal Entry:  

 

                                                              

Adjustment:

If Unearned Income is given outside the trial balance: In such cases, two entries will be passed-

  • Will be deducted from the related Income A/c in the Cr. side of the Profit & Loss A/c
  • Will be shown in the Liabilities side of the Balance Sheet.

If Unearned Income is given inside the trial balance: It will only be shown in the Liabilities side of the Balance Sheet.

6. Interest on Capital

Sometimes there is a provision of interest being given on the capital brought in by the proprietor or partners. Interest on Capital is a loss to the business while profit for the proprietor. 

Journal Entry:  

 

                                                          

Adjustment:

If Interest on Capital is given outside the trial balance: In such case, two entries will be passed-

  • It is shown in the Dr. side of the Profit & Loss A/c.
  • Amount of Interest on Capital is added to the Capital A/c in the Liabilities side of the Balance Sheet.

If Interest on Capital is given inside the trial balance: It will only be shown in the Dr. side of the Profit & Loss A/c.

7. Interest on Drawings

Money or Goods withdrawn by the proprietor from the business for personal use is called drawings. Drawings are a sort of loan taken by the proprietor from the business. Sometimes proprietor has to pay interest on his drawings which is called Interest on Drawings.

 Journal Entry:

 

                                                                

Adjustment:

If Interest on Drawings is given outside the trial balance: In such case, two entries will be passed-

  • It is shown in the Cr. side of the Profit & Loss A/c. (It is a kind of income for the business)
  • Amount of Interest on Drawings is added to the Drawings A/c  and deducted from the Capital A/c in the Liabilities side of the Balance Sheet.

If Interest on Drawings is given Inside the trial balance: It will only be shown in the Cr. side of the Profit & Loss A/c.

8. Interest on Deposits

The interest received on the amount deposited in the Bank is called Interest on Deposits. It is an income for the firm.

 Journal Entry:

 

                                                    

Adjustment:

If Interest on Deposits is given outside the trial balance: In such case, two entries will be passed-

  • It is shown in the Cr. side of the Profit & Loss A/c. (It is income for the business)
  • Amount of Interest on Deposits is added to the Bank Deposits in the Assets side of the Balance Sheet.

If Interest on Deposits is given Inside the trial balance: It will only be shown in the Cr. side of the Profit & Loss A/c.

9. Interest on Loan

If money is invested in the business by taking a loan then interest has to be paid on that loan. If Interest has not been paid in the same financial year then this is called Outstanding Interest. So, the entries will be the same as Outstanding Expenses ( Point No. 2 of Adjustments of this Article

 Journal Entry:

 

Adjustment:                                                        

If Interest on Loan is given outside the trial balance: In such case, two entries will be passed-

  • It is shown in the Dr. side of the Profit & Loss A/c.
  • Amount of Interest on Loan is added to the Loan A/c in the Liabilities side of the Balance Sheet.

If Interest on Loan is given Inside the trial balance: It will only be shown in the Dr. side of the Profit & Loss A/c.

10. Proprietor’s Salary: 

If the proprietor work in the firm, the firm has to a pay salary to the proprietor. The proprietor’s salary is an expense to the firm.

Journal Entry:

 

                                                              

Adjustment:

If Proprietor’s Salary is given outside the trial balance: In such case, two entries will be passed-

  • It is shown in the Dr. side of the Profit & Loss A/c.
  • Amount of Proprietor’s Salary is added to the Capital A/c in the Liabilities side of the Balance Sheet.

If Proprietor’s Salary is given Inside the trial balance: It will only be shown in the Dr. side of the Profit & Loss A/c.

11. Depreciation

Reduction in the value of fixed assets due to wear and tear caused by continuous use or any other reason is called Depreciation. It is a loss to the business.

 Journal Entry:

 

                                                             

Adjustment:

If Depreciation is given outside the trial balance: In such case, two entries will be passed-

  • It is shown in the Dr. side of the Profit & Loss A/c.
  • Amount of Depreciation is deducted from the concerned Fixed Assets in the Assets side of the Balance Sheet.

If Depreciation is given Inside the trial balance: It will only be shown in the Dr. side of the Profit & Loss A/c.

12. Appreciation

Sometimes the value of Fixed Assets increases due to a change in the price level, such an increase is called Appreciation. It is a type of income for the business.

 Journal Entry:

 

                                                          

Adjustment:

If Appreciation is given outside the trial balance: In such case, two entries will be passed-

  • It is shown in the Cr. side of the Profit & Loss A/c.
  • Amount of Appreciation is added to the concerned Fixed Assets in the Assets side of the Balance Sheet.

If Appreciation is given Inside the trial balance: It will only be shown in the Cr. side of the Profit & Loss A/c.

13. Bad Debts

A businessman sells his goods on cash as well as on credit. The buyers to whom the goods are sold on credit are called Debtors. These are also known as Book Debts. When a debtor is unable to pay off his debts due to any reason then such debts are called irrecoverable or Bad Debts. It is a loss to the business.

  Journal Entry:

 

                                                           

Adjustment:

If Bad Debts is given outside the trial balance: In such case, two entries will be passed-

  • It is shown in the Dr. side of the Profit & Loss A/c.
  • Amount of Bad Debts is deducted from the Debtors in the Assets side of the Balance Sheet.

If Bad Debts is given Inside the trial balance: It will only be shown in the Dr. side of the Profit & Loss A/c.

14. Provision for Bad & Doubtful Debts

Even after deducting the bad debts from the debtors, all the remaining debtors cannot be considered as Good Debtors. We may have doubts about some of the debtors that whether they will be able to pay their debts or not, for such doubtful debtors a provision for a certain amount from the current year’s profit is made so that next year the amount which remains unrecovered can be adjusted from the provision.

   Journal Entry:

 

                                                       

Adjustment:

If Provision for Bad & Doubtful Debts is given outside the trial balance: In such case, two entries will be passed-

  • It is shown in the Dr. side of the Profit & Loss A/c.
  • Amount of Provision for Bad & Doubtful Debts is deducted from the Debtors in the Assets side of the Balance Sheet.

If Provision for Bad & Doubtful Debts is given inside the trial balance: It will only be shown in the Dr. side of the Profit & Loss A/c.

15. Bad Debts Recovered:

Sometimes the amount earlier written as Bad Debts is now recovered, it is considered as a gain to the business.

  Journal Entry:

 

                                                               

Adjustment:

If Bad Debts Recovered is given outside the trial balance: In such case, two entries will be passed-

  • It is shown in the Cr. side of the Profit & Loss A/c or case of Bad Debts already given then it is deducted from Bad Debts in the Dr. side of the Profit & Loss A/c.
  • Amount of Bad Debts Recovered is added to Cash A/c in the Assets side of the Balance Sheet.

If Bad Debts Recovered is given inside the trial balance: It will only be shown in the Cr. side of the Profit & Loss A/c  or in e of Bad Debts already given then it is deducted from Bad Debts in the Dr. side of the Profit & Loss A/c.

16. Provision for Discount on Debtors

Almost all businessmen provide discounts to their debtors to encourage them to make prompt payments. Provision for Discount on Debtors is created in the same way as the provision for bad & doubtful debts because at the end of the year there will undoubtedly be some debtors who will be provided da iscount to receive prompt payments next year. 

  Journal Entry:

 

                                                

Adjustment:

If Provision for Discount on Debtors is given outside the trial balance: In such case, two entries will be passed-

  • It is shown in the Dr. side of the Profit & Loss A/c.
  • Amount of Provision for Discount on Debtors is deducted from the Debtors in the Assets side of the Balance Sheet.

If Provision for Discount on Debtors is given inside the trial balance: It will only be shown in the Dr. side of the Profit & Loss A/c.

17.  Provision for Discount on Creditors

Like the way we provide discounts to our debtors, in the same way, our creditors provide a  discount to us for receiving prompt payments. Discount received is a gain for the business.

 Journal Entry:

 

                                                           

Adjustment:

If Provision for Discount on Creditors is given outside the trial balance: In such case, two entries will be passed-

  • It is shown in the Cr. side of the Profit & Loss A/c.
  • Amount of Provision for Discount on Creditors is deducted from the Creditors A/c in the Liabilities side of the Balance Sheet.

If Provision for Discount on Creditors is given inside the trial balance: It will only be shown in the Cr. side of the Profit & Loss A/c.

18. Loss of Insured Goods and Assets: 

Sometimes businessman faces the loss of Goods or Assets due to fire, flood, earthquake, etc. This type of loss is called abnormal loss. Mostly all the goods and assets are insured. 

(I) Accounting treatment of loss of Insured Goods: Such losses are classified into three categories:

A} Insurance Company doesn’t accept the claim-

 Journal Entry:

 

               

Adjustment:

If  Loss by Accident/Fire/Theft is given outside the trial balance: In such case, two entries will be passed-

  • Will be shown in the Cr. side of the Trading A/c. [By Goods Lost] [At the total amount of loss]
  • Will be shown in Dr. side of Profit & Loss A/c. the [At the actual amount of Loss]

If Loss by Accident/Fire/Theft is given inside the trial balance: It will only be shown in the Dr. side of the Profit & Loss A/c.

B} Insurance company partially accepted the claim-

 Journal Entry:

 

                     

Adjustment:

If  Loss by Accident/Fire/Theft is given outside the trial balance: In such case, three entries will be passed-

  • Will be shown in the Cr. side of the Trading A/c. [By Goods Lost] [At the total amount of loss]
  • Will be shown in Dr. side of Profit & Loss A/c. [At the actual amount of Loss]
  • Will be shown in the Assets side of the Balance Sheet. [By Insurance Claim] [Value of Claim Accepted]

If Loss by Accident/Fire/Theft is given inside the trial balance: It will only be shown in the Dr. side of the Profit & Loss A/c.

C} Insurance Company fully accept the claim-

 Journal Entry:

 

                                                           

Adjustment:

If  Loss by Accident/Fire/Theft is given outside the trial balance: In such case, two entries will be passed-

  • Will be shown in the Cr. side of the Trading A/c. [By Goods Lost] [At the total amount of loss]
  • Will be shown in the Assets side of the Balance Sheet. [By Insurance Claim] [Value of Claim Accepted]

If Loss by Accident/Fire/Theft is given inside the trial balance: It will only be shown in the Dr. side of the Profit & Loss A/c.

 

(II) Accounting treatment of loss of Insured Assets: Such losses are classified into three categories:

A} Insurance Company doesn’t accept the claim-

Journal Entry:

 

Adjustment:

If  Loss by Accident/Fire/Theft is given outside the trial balance: In such case, two entries will be passed-

  • Will be shown in Dr. side of Profit & Loss A/c. [At the actual amount of Loss]
  • Will be deducted from the Particular Asset in the Assets side of the Balance Sheet. [At the full amount of loss]

If Loss by Accident/Fire/Theft is given inside the trial balance: It will only be shown in the Dr. side of the Profit & Loss A/c.

B} Insurance company partially accepted the claim-

Journal Entry:

 

                      

Adjustment:

If  Loss by Accident/Fire/Theft is given outside the trial balance: In such case, three entries will be passed-

  • Will be shown in Dr. side of Profit & Loss A/c. [At the actual amount of Loss]
  • Will be deducted from the Particular Asset in the Assets side of the Balance Sheet. [At the full amount of loss]
  • Will be shown in Assets side of the Balance Sheet. [By Insurance Claim] [Value of Claim Accepted]

If Loss by Accident/Fire/Theft is given inside the trial balance: It will only be shown in the Dr. side of the Profit & Loss A/c.

C} Insurance Company fully accept the claim-

Journal Entry:

 

                                                        

Adjustment:

If  Loss by Accident/Fire/Theft is given outside the trial balance: In such case, two entries will be passed-

  • Will be shown in Assets side of the Balance Sheet. [By Insurance Claim] [Value of Claim Accepted]
  • Will be deducted from the Particular Asset in the Assets side of the Balance Sheet. [At the full amount of loss]

If Loss by Accident/Fire/Theft is given inside the trial balance: It will only be shown in the Dr. side of the Profit & Loss A/c.

19. Goods are given away as Charity or Free Sample

Sometimes Goods are given as charity or free sample. In accounting terms, it is considered as loss.

Journal Entry:

 

                                                     

Adjustment:

If  Charity/Free Sample is given outside the trial balance: In such case, two entries will be passed-

  • Will be shown in 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

If Charity/Free Sample is given inside the trial balance: It will only be shown in the Dr. side of the Profit & Loss A/c.

20. Goods used for Personal Purpose

Sometimes proprietors withdraw goods from the business for personal use. Business treat those goods as Drawings.

Journal Entry:

 

                                                         

Adjustment:

If  Goods used for Personal Purpose is given outside the trial balance: In such case, two entries will be passed-

  • Amount of Goods used for Personal Purpose (Drawings) will be deducted from Purchases A/c in the Trading A/c
  • Amount of Goods used for Personal Purpose (Drawings) will be added to Drawings then deducted from Capital A/c in the Liabilities side of Balance Sheet.

21. Use of Goods in Business

When a trader uses a portion of goods purchased for the business then that portion of goods becomes Assets for the business. 

Journal Entry:

 

                                                      

Adjustment:

If  Use of Goods in Business is given outside the trial balance: In such case, two entries will be passed-

  • Amount of Goods used in Business will be deducted from Purchases A/c in the Trading A/c
  • Amount of Goods used in Business will be shown as an Asset in the Assets side of the Balance Sheet.

22. Manager’s Commission on Profit

Sometimes the Manager in the firm asks for a commission on the Gross Profit or Net Profit. It is an expense to the business.

Journal Entry:

 

                                          

Adjustment:

If Manager’s Commission is given outside the trial balance: In such case, two entries will be passed-

  • Will be shown in the Dr. side of the Profit & Loss A/c
  • Amount of Manager’s Commission is shown as an Outstanding Liability in the Liabilities side of the Balance Sheet.

23. Deferred Revenue Expenditure

Sometimes there are certain expenses the benefit of which is received for some years but the payment is made in the current financial year itself. If the total burden of such expenses is put on the current financial year then it would be wrong as the profits will be reduced while the benefit out of such expense will be received for some years. Thus, such expenses are divided equally for an estimated period of receiving benefits. 

Journal Entry:

 

 Adjustment:                                                  

If Deferred Revenue Expenditure is given outside the trial balance:

  • Will be shown in the Dr. side of the Profit & Loss A/c
  • The remaining amount of the Deferred Revenue Expenditure [For future years] is shown as an asset in the Assets side of the Balance Sheet.

24. Contingent Liabilities: 

Contingent Liability is such a liability that is not a liability on the date of preparing the Balance Sheet but in the future due to some specific turn of events become a liability.

Accounting Treatment: No record is kept in the books of accounts for the contingent liability, it should be mentioned as a NOTE below the Balance Sheet.

25. Sale of Goods on Sale or Return Basis

When Goods are sold as Sale or Return Basis then this should not be treated as an actual sale till the customer gives his approval. If such a sale has been already entered in the sales book then an adjustment entry should be made to rectify the error made.

Journal Entry:

SALE

 

                               

 Adjustment:

 If  Sale of Goods on Sale or Return Basis is given outside the trial balance: In such case, four entries will be passed-

  • The amount will be deducted from Sales A/c in the Cr. Side of the Trading A/c.[At Selling Price]
  • The amount will be deducted from Debtors on the Assets side of the Balance Sheet.[At Selling Price]
  • The amount will be added to Closing Stock in the Cr. side of the Trading A/c.[At Cost Price]
  • The amount will be added back to Closing Stock in the Assets side of the Balance Sheet.[At Cost Price]

26. Goods in Transit

Sometimes ordered goods are dispatched by the supplier but not received till the date of preparing the Balance Sheet. We have to make an adjustment entry in such a case.

Journal Entry:

 

Adjustment:

If  Goods in Transit is given outside the trial balance: In such case, two entries will be passed- 

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

If  Goods in Transit is given inside the trial balance: It will only be shown in the Assets side of the Balance Sheet.



Last Updated : 14 Aug, 2023
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