Final accounts with detail adjustments

Final Accounts and Its adjustment for practice and clarity

1. 1

2. For Quick Revision of following topics, please see my presentation ‘Financial Statements of Sole Trader with Adjustments 1 2 Meaning and Need of Adjustments Important Adjustments: Closing Stock Outstanding Expenses Prepaid or Unexpired Expenses Accrued Income Unearned Income or Income Received in Advance Depreciation Bad Debts Provision for Bad and Doubtful Debts P ro visi o n f or dis c ou n t on deb t ors

3. Learning Objectives: 3 A cc oun t ing T r eatment of A dju s tment s : P r o vision f or dis c ount on c r ed i t ors In t e r est on Capital In t e r est on D r a wi n gs In t e r est on L oan Loss of goods by fire, theft, accidents etc. Goods withdrawn by proprietor for personal use Goods given as charity Goods distributed as free sample Goods used in construction of a fixed assets Goods sold on sale or return basis

4. Learning Objectives: 4 A cc ounting T r eatment o f A djustmen t s : Loss of fixed assets Commission payable to manager Writing off deferred revenue expenditure Errors and omissions O ther adjustments

5. Provision for Discount on Creditors 5 Thi s ad j us t me n t i s n o t s u p p o r t ed b y Prude n c e Principle. If i t i s g i v en i n th e que s tio n , the n i t w i ll be t r e a t ed accordingly. C a l c ul a ti o n o f p r o v is i on f or dis c o u n t o n c r ed i t o r s , depends upon our past experience. Adjustment Entry: Provision for Discount on Creditors Dr. T o P r o f i t and L oss A / c

6. Provision for Discount on Creditors 6 Treatment in Final Accounts: It is shown on the credit side of Profit and Loss A/c. It is deducted from creditors on the liabilities side of Balance Sheet. Net amount credited to Profit and Loss Account may also be calculated with the help of following equation: D i scou nt r e c ei v e d + P ro vis i o n t o b e main t ai n e d - Provision given in the trial balance

7. Provision for Discount on Creditors - Example 7 M a k e a p ro visi o n f or dis c ount on c r edi t ors @3%. Information given in trial balance D r . ( R s .) Cr. (Rs.) 80,000 4, 5 00 Creditors P ro v i sion f or dis c ou n t on c r edi t ors 4 ,000 Discount received Solution Amount to be shown in P & L A/c = Discount received + Provision to be maintained - Provision given in the trial balance ⚫ = 4,500 + 2,400 – 4,000 = 2,900

8. Profit and Loss Account Particulars Rs. Particulars Rs. By Discount Received 4,500 Add: New Prov. For Discount on creditors 2,400 Less: Existing Provision - 4.000 2,900 8 Balance Sheet Liabilities Rs. Assets Rs. Creditors 80,000 Less: Prov. for discount to be received 2,400 77,600

9. Interest on Capital 9 Adjustment Entry: Interest on Capital A/c Dr. T o Ca p ita l A / c Treatment in the final accounts: It is shown on the debit side of Profit and Loss A/c. It is added to capital on the liabilities side of Balance Sheet.

10. Interest on Drawings 10 Adjustment Entry: Capital A/c Dr. T o In t e r est on D r a win g s A / c Treatment in the final accounts: It is shown on the credit side of Profit and Loss A/c. It is deducted from capital on the liabilities side of Balance Sheet.

11. Outstanding Interest on Loan Borrowed 11 Adjustment Entry: Interest on Loan A/c Dr. T o Ou t s t a nd i n g In t e r est A / c Treatment in the final accounts: It is added to interest on loan or as a separate item on the debit side of Profit and Loss Account. It is added to loan or shown as a separate item on the liabilities side of Balance Sheet.

12. Interest on Loan Borrowed 12 Implied or hidden adjustment. If a loan account carrying certain rate of interest is given on the credit side of the trial balance, then it is essential to calculate interest at the rate mentioned and check whether full interest has been paid or not. If not, then adjustment should be made for outstanding interest on loan, as mentioned above.

13. Interest on Loan Borrowed - Example 13 Make adjustments from the information given below. Dr. (Rs.) Cr. (Rs.) Loan @ 15% p.a. 1,00,000 Interest on loan 9,000 Capital 60,000 Drawings 12,000 Solution Allow interest on capital @ 12%. Charge interest on drawings @ 8%. Outstanding interest on loan is Rs. 6,000 (15,000 - 9,000).

14. Profit and Loss Account Dr. Cr. Particulars Rs. Particulars Rs. To Interest on Loan 9,000 By Interest on Drawings 960 Add: O/S Interest 6,000 15,000 To Interest on Capital 7,200 14

15. Balance Sheet Liabilities Rs. Assets Rs. Capital 60,000 Less: Drawings (12,000) Add: Interest on Cap. 7,200 Less: Interest on (960) Drawings 54,240 Loan 1,00,000 Add: Interest O/S 6,000 1,06,000 15

16. Loss of goods by fire, theft, accident etc. 16 ( i) ( ii) For gross loss of goods: Abnormal Loss of Goods A/c Dr. T o P u r chases/ T r adi n g A/c (Being loss of goods recorded) For insurance claim accepted: Insurance Claim A/c Dr. T o Abnor m al L oss of Goods A/c (Being insurance claim accepted by the insurance co.) (iii) For net loss of goods, i.e., gross loss minus insurance claim accepted: Profit and Loss A/c Dr. T o Abnor m al L oss of Goods A/c (Being net loss of goods transferred to Profit and Loss A/c)

17. Loss of goods by fire, theft, accidents etc. 17 Direct Entry In place of above three entries, following entry may also be passed if abnormal loss account is not shown in books: Insurance Claim A/c Profit and Loss A/c D r . D r . T o Pu r chases/ T r adi n g A / c (Being insurance claim and loss of goods recorded)

18. Loss of goods by fire, theft, accidents etc. 18 Treatment in Final Accounts: Cost of goods lost/destroyed is either deducted from purchases or shown on the credit side of Trading A/c. Net Loss , i.e., gross loss less insurance claim accepted, if any, shall be shown on the debit side of Profit and Loss A/c. Insurance claim accepted will be shown on the assets side of Balance Sheet.

19. Goods withdrawn by proprietor for personal use 19 D r . Adjustment Entry: Drawings A/c T o Pu r chase s A / c Treatment in the final accounts: It is deducted from the purchases on the debit side of Trading Account. It is deducted from the capital on the liabilities side of balance Sheet as drawings.

20. Goods given as Charity 20 A djustme n t Ent r y: Charity A/c Dr. T o Pu r chase s A / c (Being goods given as charity) Treatment in the final accounts: The cost of goods given as charity shall be deducted from the purchases on the debit side of Trading A/c. It is shown on the debit side of Profit and Loss A/c.

21. Goods distributed as free sample 21 D r . Adjustment Entry: Free Samples or Advertising A/c T o Pu r chase s A / c (Being goods given as charity) Treatment in the final accounts: Th e c ost of g o o d s g i v en as f r ee sample i s deduc t ed from purchases in the Trading Account. It is shown on the debit side of Profit and Loss A cc ount as i t i s an e x pe n se f or th e busines s .

22. Goods used in construction of a fixed assets 22 Adjustment Entry: B u ild i n g A / c D r . ( c ost of g o o ds) T o P u r chase s A / c (Being goods used in construction of building) Treatment in the final accounts: The cost of goods used in construction of building is deducted from purchases in Trading Account. Add to Building in the Balance Sheet.

23. Goods used in construction of a fixed assets 23 Example: A firm dealing in iron and steel items, used some steels and iron worth Rs. 10,000 in construction of building. Adjustment Entry: Building A/c Dr. (cost of goods) T o Pu r chase s A/c (Being goods used in construction of building) Treatment in the final accounts: The cost of goods used in construction of building is deducted from purchases in Trading Account. Add to Building in the Balance Sheet.

24. Goods sold on sale or return basis or Sale of goods on approval basis 24 Adjustment Entries: a) b) Sales A/c Dr. (Sale price of goods) T o Deb t ors A / c (Being goods sold on approval basis, but not yet confirmed adjusted) Closing Stock (with customers) A/c Dr. T o T r adi n g A / c (Being stock with customers recorded)

25. Goods sold on sale or return basis or Sale of goods on approval basis 25 Treatment in the final accounts: Sales amount is deducted from sales in Trading A cc ount and f r om deb t ors i n th e Balan c e Shee t . C ost of such g o o d s i s added t o clos i n g s t ock sh o wn on the credit side of the Trading Account and the assets side of Balance Sheet.

26. Goods sold on sale or return basis - Example 26 Goods priced Rs. 10,000 was sold on sale or return basis. Confirmation not received. Sale price includes a profit of 20%. Treatment in the final accounts: Sales amount (Rs. 10,000) shall be deducted from sales in Trading A/c and from debtors in the B/S. Cost of such goods Rs. 8,000 shall be added to closing stock shown on the credit side of the Trading A/c and the assets side of B/S.

27. Loss of Fixed Asset 27 Adjustment Entry: Insurance Claim A/c Profit and Loss A/c Dr. (Claim accepted) Dr. (Net Loss) To Fixed Assets A/c (Gross Loss) (Being loss of fixed and insurance claim recorded)

28. Loss of Fixed Asset 28 Treatment in Final Accounts: Net loss of fixed assets is shown on the debit side of Profit and Loss Account. Insurance claim accepted is shown on the assets side of Balance Sheet as a separate item. V alue of f i x ed assets dest r o y ed i s deduc t ed f r om the respective asset on the assets side of Balance Sheet.

29. Loss of Fixed Asset - Example 29 Information from Trial Balance as on 31 March, 20x1 Furniture Rs. 50,000 Adjustment: Furniture having a book value (at the beginning of the year) of Rs. 10,000 was destroyed by fire on the last week of March and insurance company has accepted a claim of Rs. 3,400. C om p a n y cha r g es de p r eci a tio n on furn i t u r e @10% on written down value method.

30. Solution 30 Treatment in Final Accounts: i. Gross Loss = 10,000 – 1,000 (Dep.) = 9,000. It will be deduc t ed f r om th e F urnitu r e on th e assets side of Balance Sheet. Net loss of fixed assets Rs. 5,400 (9,000 – 3,400) will be shown on the debit side of Profit and Loss A/c. Insurance claim accepted Rs. 3,400 will be shown on the assets side of Balance Sheet as ‘Insurance Claim’ in Current Assets.

31. Manager’s Commission Payable on Profits Calculation of Commission 100 ii. When commission is payable on net profit after charging such commission: i. When commission is payable on net profit before charging such commission: Commission = Net Profits before Commission  Rate R a t e 31 10  R a t e Commission = Net Profits before Commission 

32. Manager’s Commission Payable on Profits 32 A djustmen t en t r y: Profit & Loss A/c Dr. T o C omm i ssion P a y able A / c (Being commission payable to manager) Treatment in Final Accounts: I t will b e sh o wn on th e debi t side of P r o f i t & L oss a c c ount and Shown as a separate item on the liabilities side of Balance Sheet.

33. Manager’s Commission Payable on Profits 33 Example: A firm’s net profit before charging manager’s commission is Rs. 55,000. Calculate the manager’s commission and net profit, if rate of commission is – 10% on net profits before charging such commission, and 10% on net profits after charging such commission.

34. Manager’s Commission Payable on Profits Calculation of Commission a) When commission is payable on net profit before charging such commission: Commission = Net Profit before commission 𝑅𝑎 𝑡 𝑒 100 C omm i ssion = 5 5,000 10 34 100 = Rs. 5,500

35. Manager’s Commission Payable on Profits Calculation of Commission b) When commission is payable on net profit before charging such commission: Commission = Net Profit before commission 𝑅 𝑎 𝑡 𝑒 100+𝑅𝑎𝑡𝑒 C omm i ssion = 5 5,000 10 35 10 + 5 = Rs. 5,000

36. Write off deferred revenue expenditure 36 Deferred revenue expenditures are those expenditures which are revenue in nature but these benefit for more than one year. According to matching concept, the whole of such expenditure can not be charged to P and L A/c of the year in which it has been incurred as its benefits are derived over a number of years. An appropriate part of it should be written off by debiting to P and L A/c . Example . Rs. 30,000 have been spent by a firm on advertisement campaign to launch a new product. It is estimated that its benefit will last for 3 years.

37. Write off deferred revenue expenditure 37 10,000 Adjustment Entry: Profit & Loss A/c Dr. 10,000 T o De f er r ed A d v er t i sement E x p . A/c (Being Deferred Advertisement Exp. written off ) Treatment in final accounts: The amount written off (Rs. 10,000) will be shown on the debit side of the Profit and Loss Account. The unwritten off amount (Rs. 20,000) will be shown on the assets side of the Balance Sheet.

38. Errors and Omissions 38 Goods sold and dispatched but omitted to be recorded. I t will b e ad d ed t o sales i n th e T r ading A cc ount and also be added to the debtors on the assets side of Balance Sheet. Note: It is to be noted that such amount should also be considered for the purpose of calculating provision for bad debts.

39. Errors and Omissions 39 Goods purchased and included into stock but omitted to be recorded. Adjustment Entry: Purchases A/c Dr. T o C r edi t ors (I n d i v i dua l ) A/c Treatment in Final Accounts: I t will b e ad d ed t o pu r chase s i n th e T r ading A cc ount and also be added to the creditors on the liabilities side of Balance Sheet. Note: It is to be noted that for the purpose of calculating p r o v i sion f or dis c ount on c r edi t or s , such amou n t sho u ld also be considered

40. Errors and Omissions 40 Capital expenditure wrongly treated as revenue expenditure. Deduct the amount from revenue expenditure in the Trading/Profit and Loss Account and add to the respective asset on the assets side of Balance Sheet. Note: It is to be noted that depreciation should be charged on increased value of such asset.

41. Errors and Omissions 41 C api t a l e x pendit u r e w r o n g ly t r ea t ed as revenue expenditure. Example: Balances in trial balance: C r . Machinery and equipments Repairs Dr. 72,0 00 15,000 An equipment purchases for Rs. 8,000 has been debited to Repairs A/c. Charge depreciation@10% on machinery and equipments.

42. Errors and Omissions 42 Revenue expenditure wrongly treated as capital expenditure. Add the amount to the revenue expenses in the Trading/Profit and Loss Account and deduct from the asset wrongly charged, on the assets side of Balance Sheet. It is to noted that depreciation should be charged on the reduced value of such asset. Example: Balances in trial balance: Dr. Cr. Building 82,000 Wages 15,000 W a g es ( R s . 3 ,000) paid f or c o n st r uct i on of buil d in g has been debited to wages account.

43. Errors and Omissions 43 Remuneration paid to an employee was debited to his personal account. It will be added to salaries on the debit side of Profit and Loss Account, and also deducted from debtors on the assets side of Balance Sheet. Example: Balances in trial balance: Dr. Cr. Salaries 12,000 M r . X 2,000 Salaries paid to Mr. X has been debited to his personal A/c

44. Other adjustments 44 A person has a debit balance as debtors and also a credit balance as creditor. In th i s c ase, l o w er o f th e t w o bala n c es sh a ll be deducted from debtors as well as from creditors. It is to be noted that provision for bad debts shall be created on the reduced debtors.

45. E x ample 45 Information from a Trial Balance Sundry Debtors Rs. 29,000 Sundry Creditors Rs. 14,800 Mr. Harish is included in debtors for Rs. 3,000 and also in creditors for Rs. 2,000. Solution: Deduct R s . 2,00 (l o w er of th e t w o) f r om Deb t ors as well Creditors. Any adjustment for provision for Bad debts and discount shall be made on the balance of debtors and creditors, i.e., Rs. 27,000 and 12,800 respectively.

46. THAN K S 46