Accountancy

Final Accounts – Miscellaneous Adjustments :

1) Goods worth Rs. 200 were used by the proprietor for his personal use

Journal Entry
Add : Drawings Drawings A/c Dr
Less : Purchases To Purchases A/c

2) Goods worth of Rs. 100 at Sale Value have been used by the
proprietor
Journal Entry
Add : Sales Drawings A/c
Add : Drawings To Sales A/c

3) a) Life Insurance Premium b) Income Tax

Both these expenses cannot considered as business expenses and so

should not be debited to Profit & Loss A/c

Any Premium paid for insuring the life of the proprietor is his personal
expenditure

The above balances appearing in Trial Balance as debit should be

Deducted from Capital along with Drawings

1
4) Stock / Goods lost by fire

(a) If it is already in Trial Balance – It may be Shown in P&L A/c -

Debitside as Loss of stock by fire

(b) If it given in adjustment as

Goods destroyed by fire but not covered by Insurance Rs 1000

(i) Trading A/c (Credit side) – By Goods Destroyed by fire 1000

(ii) Profit & Loss A/c (Debit side) – To Loss by fire 1000

(c) If it given in adjustment as

Closing stock valued at Rs. 15000 includes damaged and
destroyed goods worth Rs 3000 and the Insurance Company has
admitted the claim in full.

Trading A/c Profit & Loss A/c Balance Sheet

Assets
By Cl Stock 12000 Nil Nil Cl Stock 12000
,, Destroyed Claim due 3000
Goods 3000 from Insurance

 Cl Stock - Closing Stock

(d) If it given in adjustment as

(i) Closing Stock on 31/12/2004 was valued at Rs. 20,000
(ii) Stock destroyed by Tsunami on 26/12/2004 Rs. 5,000
(iii) Insurance Company admitted the claim for Rs. 4,000

Trading A/c Profit & Loss A/c Balance Sheet

Assets
By Cl Stock 20000 To Loss by Cl Stock 20000
,, Destroyed Tsunami 1000 Claim due 4000
Goods 5000 from Insurance

2
 5) Wages paid to workers for erection of Machinery has been charged
to Wages A/c

Add : Plant & Machinery A/c ( Asset Side of Balance Sheet )

Less : Wages A/c ( Debit side of Trading A/c )

6) Transfer Rs. 5000 to Reserve Fund

Debit : Reserve Fund ( Profit & Loss A/c )

Credit: Reserve Fund ( Liability side of Balance Sheet )
( A Certain amount of Net Profit earned is set aside for unforeseen
expenditure which reduces the share of Net profit of the Business )

7) Cheques worth Rs. 8000 were deposited on 20th December 2004

of which cheques deposited worth Rs. 3000 were dishonoured.

Add: Sundry Debtors by Rs. 3000 ( Asset side of Balance Sheet )

Less: Cash at Bank by Rs. 3000 ( Asset side of Balance Sheet )

8) Wages Rs. 15000 includes the amount spent on salaries Rs. 4000.

Add : Salaries A/c ( Debit side of Profit & Loss A/c )

Less : Wages A/c ( Debit side of Trading A/c )

9) Salary due to the proprietor Rs. 4000

Add : Salaries A/c ( Debit side of Profit & Loss A/c )

Add : Capital A/c ( Liability side of Balance Sheet )

10) Rent Rs. 100 per month for the last Quarter is Unpaid

Add : Rent A/c ( As O/s Rent ) ( Profit & Loss A/c ) – Rs 300 *
Add : Rent O/s / Rent payable / O/s Creditors - Rs 300 *
( Liability side of Balance Sheet )

*Note : (Rs 100 per month for the last Quarter means 100 x 3 months)

3
11) Commission earned but not received

Add : Commission Receipts A/c ( Credit side of Profit & Loss A/c )
Add / Show : Commission Receivable A/c ( Asset side of Balance Sheet )

12) Commission Received but not earned

Add/ Show : Commission Received in Advance ( Liability side of B/S )

Less : Commission Received A/c ( Credit Side of Profit & Loss )

13) Unexpired Insurance Carried Forward

Add / Show : Prepaid Insurance ( Asset Side of Balance Sheet )

Less : Insurance A/c ( Debit side of Profit & Loss A/c )

14) Travelling Expenses overdrawn to the Extent of Rs 2000

Add / Show : Prepaid Travelling Expenses ( Asset Side of B/S )

Less : Travelling Expenses ( Credit side of P & L A/c )

15) Commission Payable as percentage of Net Profit

(i) Before charging such commission

Just charge the said percentage on the balancing figure arrived at by

deducting the debit side total from the credit side total of the P&L A/c

(ii) After charging such commission

Arrive at the commission amount by the following formulae

Commission = % of Profit
X Balancing figure
100 + % of Profit

4
 Example :

Let Balancing figure arrived at by deducting the debit side total

from the credit side total of Profit & Loss A/c be 2100 and the
percentage of commission be 5 %

Commission on Net Profit after charging such commission will be

2100 X 5 = 2100 X 5 = 100

100 + 5 105

Now the Net Profit will be 2100 – 100 = 2000

( i.e. Net Profit after charging such commission is 2000 and the amount of
commission arrived is 100 which nothing but 5 % of Net Profit after charging such
commission as asked in question )

16) Goods worth Rs. 700 were distributed as free samples but not
recorded

Add : Advertisement A/c in Profit & loss A/c ( Debit Increased )

Less : Purchases in Trading A/c ( Debit Decreased )

Journal Entry
Advertisement A/c Dr
To Purchases A/c

17) Goods Sold Rs. 1000 but not delivered

Less : Closing Stock in Credit side of Trading A/c

Less : Closing Stock in Assets Side of Balance Sheet

18) Purchase invoice not recorded Rs. 1000

Add : Purchases ( Debit side in Trading A/c )

Add : Sundry Creditors ( Liabilities side in Balance Sheet )

5
 19) Omission of a credit Purchase of Machinery Rs 2000

Add : Plant & Machinery A/c ( Asset side of Balance Sheet )

Add : Sundry Creditors ( Liability side in Balance Sheet )

20) Materials worth Rs 2000 utilised for making a machinery for use in
Business but not recorded

Add: Plant & Machinery A/c ( Asset Side of Balance Sheet )

Add: Purchases A/c ( Trading A/c )

21) Sales includes an amount of Rs. 3000 collected from the Customers as
sales tax

Add : Sales Tax payable (or) Sales Tax Collection A/c

( Liability side of Balance Sheet )
Less : Sales A/c ( Credit side of Trading A/c )

22) (i) Opening Stock Rs. 7000 includes purchase of Stationery Rs. 700
(ii) Closing Stock Rs. 10000 includes stock of stationery Rs. 200

Trading A/c Profit & Loss A/c Balance Sheet

To Stationery 500 Assets
To Op St 6300 By Cl St 9800 Cl Stock 9800
Stock of
Stationery 200

* Op St - Opening Stock * Cl St - Closing Stock

Note : Actual Consumption of Stationery of Rs 500 debited to P& L A/c

( i.e. Opening Stationery Rs. 700 Less Closing Stationery Rs. 200)
and Actual Stocks ( Goods & Stationery ) reflected in Balance
Sheet

Effect : Debit Decreased in Opening Stock by Rs 700, balanced by

Debit Increase of Stationery A/c by Rs 500 in P & L A /c and
Debit Increase of Stationery A/c by Rs 200 in Assets side of B/S

6
23) Commission payable as % of Net Profit
( This adjustment is explained again more illustratively to help the candidates to make
themselves more conversant with their treatment)

(a) Before charging such commission

It is easier to calculate commission as we have to calculate the % requested on

Balancing figure ( ie.. Gross Profit minus all expenses shown in Profit and Loss A/c)

Example : Let us assume Balancing figure as arrived as above is

Rs. 11000/- and commission to be charged is 10 %

Therefore Commission will be 11000 x 10 = 1100

100

Hence Net profit will be 11000 – 1100 = 9900

(b) After charging such commission

Here we are asked to calculate % of commission on the

Net Profit after deducting such commission as both these amounts are not known
the following formula is to used

Commission = Balancing Figure x y ( where ‘y’ is the %)

100 + y

Example : Figures as per the above example

Commission will be 11000 x 10 = 11000 x 10 = 1000

100 + 10 110

Now the Net Profit will be 11000 – 1000 = 10000

( By cross verifying we can see that 10 % of NP of 10000 is the

commission of Rs. 1000 )

[Candidates should note the difference of the Commission amount

and the Net Profit in the above two circumstances ]

7
 24) A machine worth Rs. 12000/- was disposed off for Rs. 8750/- in part exchange for a
new machine costing 19000/- and the net invoice of Rs. 10250/- was entered in the
books. No Depreciation is to be provided on machinery disposed off. [Balance as per
Trial Balance - Machinery A/c - 50250/-]
( SOGE - Nov 1997)

To account for the above transaction the following thinking is necessary.

(a) A machinery worth Rs. 12000 sold should be credited to machinery A/c

(b) A machinery worth Rs. 19000 purchased is to debited to machinery A/c

(c) Net Invoice amount of Rs. 10250 already debited to Machinery A/c is to be removed

(d) The old machinery costing Rs. 12000/- is sold for Rs. 8750. That is the old machinery is sold
for a loss of Rs. 3250 (12000 – 8750) which has to be accounted for and debited to Loss on
sale of machinery A/c and transferred to Profit & Loss A/c ( Debit Side)

The treatment of the above said points in final accounts will be as under

Profit & Loss A/c Balance Sheet

To Loss on sale of P & M A/c 50250

Machinery 3250 Less: Net Invoice 10250
40000
Add: Additions 19000
59000
Less: Deductions 12000
47000

Note : Depreciation to be calculated on 47000/- ( after effecting all adjustments

effecting the concerned Asset A/c)

Cross Check : Candidates can cross check the correctness of the adjustment by noting
that the amount of the debit effect given to P&L A/c is balanced by the credit effect of
reducing the same amount in Plant and Machinery A/c in the Asset side of Balance
Sheet ( 50250 - 47000 = 3250 )

8
 25) Sundry Creditors include an amount of Rs. 2000/- realized from ‘Y’ whose account
has been written off two years back.
( SOGE - Nov 1997)

In this case the amount written off as Bad debts two years back has been realized
from one Mr. Y and the same has been credited to his account as Cash/Cheque has
been received from him now.

Crediting “Y’s account and including him in the list of Sundry Creditors means we are
liable to repay the amount to him which is not correct as the amount received from is
only what was due from him.

Hence ‘Y’ account is to be debited to remove the wrong credit given to him.

On the other hand, Bad debts written off are loss to the business and debited to Profit
and loss A/c. When the amount so written off is later recovered then they have to be
credited to “Bad debts recovered A/c” as this is a clear profit to the business and
should be transferred to Profit and Loss A/c (Credit side) in the end of the year.

There fore the adjustment journal entry will be

Sundry Creditors A/c ( Y A/c ) Dr 2000

To Bad debts recovered A/c 2000

The effect of the above journal entry in final accounts will be

Dr Profit and Loss A/c Cr Balance Sheet

By Bad debts
Recovered A/c 2000
Sundry Creditors xxxxx
Less: B D Recovered 2000

9
Indirect Adjustment (Hidden)

26) If the Trial Balance includes loan account or deposit account carrying certain rate
of interest, then it is obligatory to calculate interest at the rate mentioned.
If the interest account does not appear in Trial Balance then the complete interest
is treated as outstanding. But if it appears in the Trial Balance then it should be
compared with the amount arrived at after the calculation. The difference, if any
between these two figures is treated as interest prepaid or outstanding (Interest
received in advance or Interest accrued in case of Deposits) and should be
brought into account by an adjustment entry.

Example:

Trial Balance Dr Cr

Loan @ 6 % 10000
Interest 400

Interest @ 6% on 10000 works out to be 600, whereas interest paid as per

Trial balance is 400. So interest of Rs 200 (600-400) Interest Outstanding should be
taken into account.

By adding Interest A/c on the debit side of P&L A/c by Rs 200(ADD: Outstanding)
And
Showing Interest Outstanding on the Liabilities side of the Balance Sheet Rs. 200.

***

( If the amount given against interest in trial balance is Rs 900 then Interest Prepaid
Rs 300 (900-600) should be accounted for.

By deducting Interest A/c on the debit side of P&L A/c by Rs 300(Less:Prepaid)

And showing Prepaid Interest on the Asset side of the Balance sheet Rs 300

10
27) Provision for Bad and Doubtful Debts

Sundry Debtors are list of debtors from whom money is due to the business.
Some of the Debtors fail to pay their dues and the amount irrecoverable from them
is known and Bad Debts which is a loss to the Business and should be written off by
debiting the Profit and Loss A/c.

There may be some debtors Who’s commitment is doubtful but the firm does
not want to write it off immediately as there is a chance of receipt from them. But
however if he becomes bad debts next year then it is incorrect to charge current
year’s loss to next year’s Profit and Loss A/c.

So Provision for Bad and Doubtful Debts is created for a fixed percentage on
Sundry Debtors and debited to current years Profit and loss A/c. The Provision for B
& D debts will appear in the Balance Sheet and shown as a deduction from Sundry
debtors to display true debtors of the business. The Provision for B & D debtors A/c
will be carried forward to the next year as a credit balance* and the original
debtors as debit balance to the different personal A/c’s.

Therefore any bad debts occurring in next year will be first debited to Provision
for Bad and Doubtful debts and then this Provision for B & D debts A/c will be
transferred to the Profit and Loss A/c at the end of that year after creating further
provision for that year.

It is customary to show the debit to the Profit and Loss A/c in the following way

To Provision for Bad & Doubtful Debts

New Provision ( fixed % on Sundry Debtors**) xxxx

Add: Bad debts during the year

(i.e from Trial Balance and from adjustments) xxxx

Less: Old Provision * ( as per Trial Balance) xxxx

xxxx ***

 This is the amount given as a credit balance in the Trial Balance

** While calculating New Provision for B & D Debts care should be taken to calculate the
percentage on the amount of Sundry Debtors arrived after deducting the amount of Bad
debts given in adjustments. (also after adding or deducting other adjustments affecting
Sundry Debtors such as Cheque dishonoured, Bills Receivable dishonoured, Sales invoices
omitted etc )

11
If the amount so arrived is a minus balance then the Provision of B & D Debts is to be
credited to the Profit and Loss A/c as shown below (this is because there is a surplus in the
Provision already created which has to be transferred to P&L A/c)

By Provision for Bad and Doubtful Debts

Old Provision (Credit Balance as per Trial Balance ) xxxx

Less: Bad debts during the year

(i.e from Trial Balance and from adjustments) xxxx

Less: New Provision ( fixed % on Sundry Debtors**) xxxx

xxxx

( a careful observation will bring to light that the order of presentation is just the
reverse order adopted when the Provision for B & D debts A/c is shown in Debit side)

Illustrative Examples:

(a) When Bad debts is given in Trial balance as well as adjustments and the provision
for Bad & Doubtful debts is to be created for the first time (i.e. Provision for Bad &
Doubtful debts is not given in trial balance)

Trial Balance Dr Cr
Sundry Debtors 10300
Bad debts 200

Adjustments – (i) Write off further bad debts Rs. 300

(ii) Create provision for Bad and doubtful debts @ 5 %

Amount of Provision to be created is Rs 500 [5 % of 10000 ( 10300 – 300 )]

Profit and Loss A/c Balance Sheet

To Bad debts 200 Sundry Debtors 10300

Add: Further Less: Bad Debts 300
Bad debts 300 Less: Prov for B&D
500 Debts 500
,, Prov for Bad 9500
& D Debts 500

12
 (b) When Bad debts is given in Trial balance as well as adjustments and the provision
for Bad & Doubtful debts is given in trial balance and Provision to be maintained
given as adjustment.

Trial Balance Dr . Cr .

Sundry Debtors 10300

Bad Debts 200
Provision for B & D Debts 100

Adjustments – (i) Write off further bad debts Rs. 300

(ii) Create provision for Bad and doubtful debts @ 5 %

Amount of Provision to be created is Rs 500 [5 % of 10000 ( 10300 – 300 )]

Profit and Loss A/c Balance Sheet

To Prov for B & D Debts Sundry Debtors 10300

New Provsn 500 Less: Bad Debts 300
Add: Bad debts 200 Less: Prov for B&D
Add: Further Debts 500
Bad debts 300 9500
Less: Old Provsn 100
900

13
28) Provision for Discount on Debtors

The concept and treatment of this provision is same as Provision for B & D Debts.
Point to be noted while calculating Provision of Discount on Debtors is that it should
be calculated on Sundry Debtors arrived after deducting the Provision for Bad and
Doubtful Debts amount also along with other deductions and additions, if any
from Sundry Debtors.

29) Provision for Discount on Creditors

The concept of Provision for Discount on Creditors is straight opposite to that of

Provision of Discount on Debtors.

In the case of Provision for Discount on creditors it is a provision created in

anticipation of the Discount on creditors to be received by the business. Hence the
Profit and Loss A/c has to be credited with the amount to be treated as gain for the
current year, usually a fixed percentage on Sundry Creditors. This amount of provision is
to be shown as deduction from Sundry Creditors in the liability side of the Balance
Sheet.

Adjustment involving Provision for Discount on Sundry Creditors will appear in final
accounts as under

Profit and Loss A/c Balance Sheet

By Provision for
Discount on Crs
Sundry Creditors xxxx
Less: Provn for
Discount on Creditors xxx
xxxx

* * *

14
 29) (2) A machine worth Rs. 12000/- was disposed off for Rs. 8750/- in part exchange for a
new machine costing 19000/- and the net invoice of Rs. 10250/- was entered in the
books. No Depreciation is to be provided on machinery disposed off. [Balance as per
Trial Balance - Machinery A/c - 50250/-]
( SOGE - Nov 1997)

To account for the above transaction the following thinking is necessary.

(e) A machinery worth Rs. 12000 sold should be credited to machinery A/c

(f) A machinery worth Rs. 19000 purchased is to debited to machinery A/c

(g) From (a) and (b) above the net debit to be given to machinery A/c is
Rs. 7000 ( 19000 – 12000) whereas Rs 10250/- has been debited instead.
Hence the excess debit to Machinery A/c of Rs. 3250 (10250 – 7000) has to be removed by
crediting the Machinery A/c by Rs. 3250.

(h) The old machinery costing Rs. 12000/- is sold for Rs. 8750. That is the old machinery is sold
for a loss of Rs. 3250 (12000 – 8750) which has to be accounted for and debited to Loss on
sale of machinery A/c and transferred to Profit & Loss A/c ( Debit Side)

By incorporating the above said points a journal as below has to be passed to adjust and
correct the accounts.

Loss on sale of Machinery A/c Dr 3250

To Machinery A/c 3250

The effect of the above journal entry in final accounts will be

Profit & Loss A/c Balance Sheet

To Loss on sale of P & M A/c 50250

Machinery 3250 Less: Losson
Sale 3250
47000

Depreciation to be calculated after deducting Rs. 3250/- from MachineryA/c

Hence depreciation is to be calculated on 47000/- (50250 – 3250 )

Now Let us handle a Tougher Adjustment

( where the amount of sale value is not given and additional mistake is committed – i.e.
entry through Purchases book)

15
 30)A machine worth Rs. 12000/- was part exchanged for a new machine costing
19000/- and the net invoice of Rs. 10250/- was passed through purchase day book.
(May 2004, SOGE –Audit)
The following basic thinking is necessary to handle this situation

(a) A machinery worth Rs. 12000 sold should be credited to machinery A/c
(b) A machinery worth Rs. 19000 purchased is to debited to machinery A/c
(c) From (a) and (b) above the net debit to be given to machinery A/c will be Rs. 7000 (
19000 – 12000)
(d) The new machinery is purchased in part exchange of old machinery and the amount
paid is 10250 which gives us the sale value of old machinery as Rs. 8750 (19000 –
10250 ). That is the old machinery is sold for a loss of Rs. 3250 (12000 – 8750) which has
to be accounted for and debited to Loss on sale of machinery A/c and transferred to
P & L A/c ( Debit Side)
(e) Purchases A/c is debited by mistake and the same should be corrected by crediting
the Purchases A/c by Rs. 10250.

By incorporating the above said points a journal as below has to be passed to adjust and
correct the accounts.

Machinery A/c Dr 7000

Loss on sale of Machinery A/c Dr 3250
To Purchases A/c 10250

The effect of the above journal entry in final accounts will be

Trading A/c Balance Sheet

Profit & Loss A/c
Purchases xxxxx Plant & Mach xxxxx
Less : Machinery To Loss of Sale of Add:
Purchased 10250 Machinery 3250 Additions 7000

** Point to be carefully noted is that if there is any adjustment of Depreciation is given

the same should be charged after including the additional amount of Rs 7000 to
machinery A/c

16
31) Sundry Debtors include an amount of Rs. 2000 due from Mr. Ram Lal and
Sundry Creditors include an amount of Rs. 5000 due to Mr Ram Lal
(May 2004, SOGE – Audit)

From the above adjustment we can see that Mr Ram Lal’s A/c has been opened
twice , one showing a debit balance and the other a credit balance.

We have to set it right by transferring the debit balance of Ram Lal A/c to that of the
credit balance of Ram Lal A/c

The Ultimate effect to be given is deduction of Rs 2000 from Sundry Debtors and
deduction of Rs 2000 from Sundry Creditors

BALANCE SHEET

LIABILITIES ASSETS

Sundry Creditors xxxxx Sundry Debtors xxxxx

Less: Ram Lal A/c 2000 xxxxx Less: Ram Lal A/c 2000 xxxxx

** Special care is to be taken to deduct the said amounts in S Drs and S Crs before
calculation of the % of Provision of Bad & Doubtful Debtors, Provision of Discounts of
Debtors and Provision for Discount on Creditors

(The detailed explanations provided is for the understanding of the principle behind
the adjustments – the same need not be reproduced in the exam while attempting the
question, only the debit and credit effects may be given in the solution)

17