CHP 5 - Financial Statement (With Adjustment)

A unit of Realwaves (P) Ltd FS with Adjustment
CHAPTER 5 FINANCIAL STATEMENT WITH

ADJUSTMENT
Objectives or need of adjustments
(i) To ascertain the true net profit or loss of the business.
(ii) To ascertain the true financial position of the business.
(iii) To make a record of the transactions omitted from the books.
(iv) To rectify the errors committed in the books of accounts.
(v) To make a record of such expenses which have accrued but not been paid.
(vi) To make a record of such incomes which have accrued but not been received.
Explanation of adjustments
(i) Closing stock: The amount of goods unsold at the end of the year is called closing stock.
Treatment in final accounts: The closing stock is given outside the trial balance. Closing stock will
be shown at two places. i.e. on the credit side of the trading A/c and on the assets side of the balance
sheet.
If the closing stock appears inside the trial balance, it will be shown only on the assets side of the
balance sheet.
(ii) Outstanding expenses or expenses due but not paid: These are the expenses, which have been
left unpaid on the date of preparation of final A/c’s.
Treatment in final accounts: Outstanding expenses on the one hand, will be added to the concerned
expenses on the debit side of trading or P&L A/c and on the other hand, will also be shown on the
liabilities side of the balance sheet.
Example: extracts of trial balance as on 31st December, 04.

Name of accounts Dr balance Cr balance
Wages paid 22000
Salary paid 5500
Adjustments:
Wages ` 2000 & salary ` 500 are outstanding.
Effects on final A/c:

Trading A/c
Particulars ` Particulars `
To wages 22000
Add: outstanding wages 2000 24000
Profit & loss A/c
To salary 5500
Add: outstanding salary 500 6000
Balance sheet
Vidhyadhar Nagar: F – 45, Balaji Tower – I, Behind Vishal Mega Mart.

Mansarovar: 69/318, VT Road, Mansarovar
Contact: 9829959536,7737733360,9928001210 5.1
Liabilities Amt Assets amt
Outstanding wages 2000
Outstanding salary 500
(iii) Prepaid expenses or unexpired expenses or expenses paid in advance: These are the
expenses, which have been paid in advance for the next year during the current year itself.
Treatment in final accounts: Prepaid expenses on the one hand, will be deducted from the
concerned expenses on the debit side of trading or P&L A/c and on the other hand, will also be
shown on the assets side of the balance sheet.
Example: extracts of trial balance as on 31st Dec, 01

Insurance account 2000
Adjustment:
Prepaid insurance amounted to ` 500

Profit & loss A/c
To insurance 2000
Less: prepaid insurance 500 1500
Balance sheet
Liabilities Amt Assets Amt
Prepaid insurance 500
(iv) Depreciation: Depreciation is the loss or fall in the value of fixed assets due to their constant
use & expiry of time.
Treatment in final accounts: Depreciation on the one hand, will be shown on the debit side of P&L
A/c because it is loss or expense and on the other hand, will also be deducted from the value of the
concerned asset on the assets side of the balance sheet.
Machinery 50000
Furniture 8000
Adjustment:
Machinery is to be depreciated @ 10% p.a & furniture @ 20 % p.a.
Effects on final A/c

Profit & loss A/c
To depreciation on:
Machinery 5000
Furniture 1600

Contact: 9829959536,7737733360,9928001210 5.2
Balance sheet
Machinery 50000
Less: Dep 5000 45000
Furniture 8000
Less: Dep 1600 6400
Illustration: 1
From the following trial balance of Sh. Ramanand Sagar, prepare trading & P&L A/c for the year
ended 31st Dec, 00 & a balance sheet as on that date:
Dr balance ` Cr balance `
Opening stock 20000 Sales 270000
Purchases 80000 Purchase return 4000
Sales return 6000 Discount 5200
Carriage inwards 3600 Sundry creditors 25000
Carriage outwards 800 Bills payable 1800
Wages 42000 Capital 75000
Salaries 27500
Plant & machinery 90000
Furniture 8000
Sundry debtors 52000
Bills receivable 2500
Cash in hand 6300
Traveling expenses 3700
Lighting (factory) 1400
Rent & taxes 7200
General expenses 10500
Insurance 1500
Drawings 18000
381000 381000
Adjustments:
(i) Stock on 31st Dec, 00 was valued at ` 24000 (market value ` 30000)
(ii) Wages outstanding for Dec, 00 amounted to ` 3000
(iii) Salaries outstanding for Dec, 00 amounted to ` 2500
(iv) Prepaid insurance amounted to ` 300
(v) Provide depreciation on plant & machinery at 5% & on furniture at 20%.
Ans: Gross profit = 142000, Net profit = 87700, Balance sheet = 177000
(v) Accrued income or income earn but not receivable: It is quite common that certain items of
income such as interest on securities, commission, rent etc, are earned during the current year but
have not been actually received by the end of the current year. Such incomes are known as ‘accrued
incomes’ or ‘earned incomes’.
Treatment in final accounts: Such incomes on the one hand, will be added on the credit side of the
P&L A/c and on the other hand, will be shown on the assets side of the balance sheet because the
amount is yet to be received.

Contact: 9829959536,7737733360,9928001210 5.3
Commission received 1500
Adjustments:
Commission earned but not received ` 300

Profit & loss A/c
By commission 1500
Add: accrued commission 300 1800
Balance sheet
Accrued commission 300
(vi) Unearned income or income received in advance: It may also happen that a certain income is
received in the current year but the whole amount of it does not belong to the current year. Such
portion of this income, which belongs to the next year, is known as ‘unearned income’ or ‘income
received but not earned’.
Treatment in final accounts: Such incomes on the one hand, will be deducted from the concerned
income on the credit side of P&L A/c and on the other hand, will also be shown on the liabilities side
of the balance sheet.

Rent received 3900
Adjustments:
Rent received but not earned ` 300

Profit & loss A/c
By rent 3900
Less: unearned rent 300 3600
Balance sheet
Unearned rent 300
(vii) Interest on capital:

Treatment in final accounts: Interest on capital is an expense for the business & hence it is shown
on the debit side of profit & loss A/c. at the same time, it is a gain to the proprietor and hence is
added to his capital.

Contact: 9829959536,7737733360,9928001210 5.4
(viii) Interest on drawings: Occasionally, the proprietor draws cash or goods for his personal use.
Such withdrawals are termed as drawings. If the firm pays interest on capital, it is fully justified that
it should also charge interest on the drawings.
Treatment in final accounts: Interest on drawings is a gain to the business and hence it is shown on
the credit side of P&L A/c. at the same time, it is an expense from the proprietors view and hence
will be deducted from the capital on the liabilities side of the balance sheet.

Capital A/c 50000
Drawings A/c 8000
Adjustments:
Charge ` 300 as interest on drawings.
Charge ` 500 as interest on capital.

Profit & loss A/c
To interest on capital 500 By interest on drawings 300
Balance sheet
Capital 50000
Less: drawings 8000
42000
Less: interest on drawings 300
Add: interest on capital 500 42200
(ix) Interest on loan: Generally, item of ‘loan’ appears on the credit side of the trial balance. It
means that the amount has been borrowed from some person or from the bank etc. loan is a liability
of the firm & the interest on such loan will be an expense.
On the contrary, if the item of ‘loan’ appears on the debit side of trial balance it means that the
amount has been lent to outsiders. It will be an asset in this case and interest on such loan will be an
income for the firm.
Treatment in final accounts: Assuming that the loan appears on the credit side of the trial balance,
interest on it will be an expense and hence will be recorded on the debit side of P&L A/c.
outstanding amount of such interest will also be added to loan a/c on the liabilities side of the
balance sheet.

Loan from bank @ 12 % p.a 10000
Adjustments:
Interest on loan is due for the whole year.

Contact: 9829959536,7737733360,9928001210 5.5
Profit & loss A/c
To interest on loan 1200
Balance sheet
Loan from bank 10000
Add: outstanding interest 1200 11200
Illustration: 2
From the following trial balance of Shree Ved Vyas, prepare trading & P&L A/c for the year ended
31st Dec, 02 & balance sheet as on that date:
Particulars Dr balance Cr balance
Purchases & Sales 275000 520000
Return inwards 15000
Return outwards 9000
Carriage 12400
Wages & Salaries 58600
Trade expenses 2200
Rent 13000
Insurance 2000
Audit fees 1200
Debtors & creditors 110000 62100
Bills receivable & bills payable 3300 2200
Printing & advertising 5500
Commission 1000
Opening stock 36000
Cash in hand 12800
Cash at bank 26800
Bank loan 20000
Interest on loan 1500
Capital 250000
Drawings 15000
Fixed assets 300000
877300 877300
Adjustments:
(i) Stock at the end ` 60000
(ii) Depreciate fixed assets by 10%
(iii) Commission earned but not received amounts to ` 400
(iv) Rent received in advance ` 1000
(v) Allow 8% interest on capital and charge ` 900 as interest on drawings.

Contact: 9829959536,7737733360,9928001210 5.6
(x) Bad debts: Persons to whom goods have been sold on credit are known as ‘Debtors’. Sometimes
due to the dishonesty, death or insolvency of a debtor, full amount is not recovered from him. When
it becomes certain that a particular amount will not be recovered it is know as ‘bad-debts’.
Treatment in final accounts: Bad debts of ` 1000 given in adjustments will be added to the bad
debts of ` 800 on the debit side of the P&L A/c and the amount of ` 1000 will also be deducted from
debtors on the assets side of the balance sheet.

Bad debts 800
Adjustments:
Write off further bad debts ` 1000

Profit & loss A/c
To bad debts 800
Add: further bad debts 1000 1800
Balance sheet
Less: bad debts 1000 19000
(xi) Provision for bad & doubtful debts: Even after deducting the amount of actual bad debts from
the debtors, the list of debtors at the end of the year may include some debts which are either bad or
doubtful. As the amount of actual loss on account of current year bad debts would be known only in
the next year when the amount is realized from debtors, a provision is created to cover any possible
loss on account of bad debts likely to occur in future. Such a provision is created at a fixed
percentage on debtors every year is called ‘Provision for bad & doubtful debts’
Treatment in final accounts: The amount of Provision for bad & doubtful debts on the one hand, is
shown on the debit side of the P&L A/c and on the other hand, is deducted from sundry debtors on
the assets side of the balance sheet.

Debtors 60000
Adjustments:
Create a Provision for bad & doubtful debts @ 5% on debtors

Profit & loss A/c
To Provision for bad & 3000
doubtful debts

Contact: 9829959536,7737733360,9928001210 5.7
Balance sheet
Less: Provision 3000 57000
for bad & doubtful
debts

Bad debts account 800
Provision for doubtful debts 1.1.04 2500
(old provision)
Debtors 80000
Adjustments:
Create a Provision for doubtful debts @ 5% on debtors

Profit & loss A/c
To Provision for doubtful
debts A/c:
Bad debts 800
Add: new provision 4000
4800
Less: old provision 2500 2300
Balance sheet
Less: New Provision
(5% on ` 80000) 3000 76000
(xii) When bad debts are given in adjustments: Sometimes, bad debts are given in adjustments. In
such a case, on the one hand, these further bad – debts will be written on the debit side of the profit
& loss A/c and on the other hand, will also be deducted from debtors on the assets side. New
provision in this case, will be calculated on the amount of debtors, which remain after deducting the
amount of bad – debts there from.
Example: The following balances appeared in the trial balance of M/s Kapil Traders as on 31st Dec,
06.
Particulars `
Bad debts 500
Provision for bad debts 2000
The partners of the firm agreed to record the following adjustments in the books of the firm. Further
bad debts ` 300; maintain provision for bad debts 10%.

Contact: 9829959536,7737733360,9928001210 5.8
Effects on final A/c
Profit & loss A/c
To Provision for doubtful
debts A/c:
Bad debts 500
Add: further bad debts 300
800
Add: new provision 3020
3820
Less: old provision 2000 1820
Balance sheet
Less: further bad debts 300
30200
Less: New Provision
(10% on 30200) 3020 27180
Illustration: 3
Prepare trading, profit & loss A/c and balance sheet from the following particulars as on 31st Dec, 03
Particulars Dr balance Cr balance
Cash in hand 2000
Cash at bank 18000
Purchases & sales 220000 350000
Return inwards 6000
Return outwards 7500
Carriage on purchases 4400
Carriage on sales 2100
Fuel & power 15500
Stock (1.1.03) 36000
Bad debts 6200
Bad debts provision 2500
Debtors & creditors 82000 30000
Capital 217000
Investments 20000
Interest on investments 2000
Loan from X @ 18% p.a 10000
Repairs 1520
General expenses 10600
Land & buildings 180000
Wages & salaries 18000
Miscellaneous receipts 120
Bills Payable 5200
Stationery 2000
624320 624320

Contact: 9829959536,7737733360,9928001210 5.9
Information:
(i) Write off ` 2000, as bad debts & provision for doubtful debts is to be maintained at 5% on
debtors.
(ii) Loan from X was taken on 1st may, 03. No interest has been paid so far.
(iii) Included in general expenses is insurance premium ` 1200 paid for one year ending 31st march,
04.
(iv) 1/3 of wages & salaries are to be charged to trading A/c & the balance to P&L A/c.
(v) Entire stationery was used by the proprietor for own purpose.
(vi) Closing stock was valued at ` 50000.
(xiii) Provision for discount on debtors: Year 2010

Treatment in final accounts: Such provision is shown on the debit side of the P&L A/c & is also
deducted from sundry debtors on the assets side of the balance sheet.

Bad debts account 3600
Provision for doubtful debts 1.4.01 7500
Debtors 200000
Adjustments:
(i) Write off further bad debts ` 2000.
(ii) Provision for doubtful debts is to be maintained at 5% on sundry debtors.
(iii) Create a provision for discount on sundry debtors at 2%
Effects on final A/c: Profit & loss A/c

To Bad debts 3600 By provision for bad 7500
Add: further bad debts 2000 debts
5600
Add: new provision
(5% on 198000 i.e.
20000-2000) 9900 15500
To provision for discount

(2% on 188100 i.e.
198000-9900) 3762
Balance sheet

Less: further bad debts 2000
198000
Less: New Provision
For doubtful debts
(5% on 198000) 9900
188100

Contact: 9829959536,7737733360,9928001210 5.10
Less: provision for
discount
(2% on 188100) 3762 184338
(xiv) Adjustments relating to goods:

A) Loss of goods:
Example: Goods worth ` 10000 were burnt by fire and the insurance company has accepted a claim
of 70%.
Treatment in final accounts: ` 10000 will be deducted from purchases on the debit side of trading
A/c; ` 3000 will be shown on the debit side of P&L A/c and ` 7000 will be shown on the assets side
of the balance sheet.
B) Loss of fixed assets: If some fixed asset of the firm is destroyed by some accident such as fire
etc. the loss will be shown on the debit side of P&L A/c and also deducted from the value of asset on
the assets side of the balance sheet.
Illustration: 4
From the following adjustments & with the help of trial balance prepare a trading A/c, P&L A/c and
balance sheet as on 31st Dec, 00.
Insurance charges 2400 Capital 170000

Salaries & wages 19400 Sales 120000
Cash in hand 200 Return outwards 1200
Cash at bank 26500 Provision for doubtful debts 400
Trade exp 400 Discount 800
Postage & telegram 800 Rent of premises sublet for one year 1200
Drawings 6000 to 30th June, 01
Plant & machinery: Sundry creditors 20000
Balance on 1st Jan, 00 120000
Addition on 1st July, 00 5000
Stock on 1st Jan, 00 15000
Purchases 82000
Return inward 2000
Furniture & fixtures 5000
Freight & duty 2000
Carriage outwards 500
Rent, rates & taxes 4600
Printing & stationery 1000
313600 313600
Adjustments:
(i) Stock on 31st Dec, 00 was valued at ` 24000 stationery unused at the end was ` 250.
(ii) The provision for doubtful debts is to be maintained at 6% on sundry debtors.
(iii) Create a provision for discount on sundry debtors at 2%

Contact: 9829959536,7737733360,9928001210 5.11
(iv) Write off ` 800 as bad debts
(v) Insurance is paid up to 31st march, 01
(vi) Provide depreciation on plant & machinery @ 10 % p.a
(vii) A fire occurred on 25th Dec, 00 in the godown & stock of the value of ` 6000 was destroyed. It
was insured and the insurance co. admitted a claim of ` 4000.
Ans: Gross profit = 50200, Net profit = 7124, Balance sheet total = 191724
(xv) Charity in the form of goods:

Treatment in final accounts: On the one hand, the amount will be deducted from purchases
because it reduces the goods purchased for resale & on the other hand, it will also be shown on the
debit side of P&L A/c because it is business expense.
(xvi) Goods distributed as free samples:

Treatment in final accounts: It will be deducted from purchases in the trading A/c & will also be
shown on the debit side of P&L A/c because it is an expense of business.
(xvii) Drawings in goods:

Treatment in final accounts: It will be deducted from purchases in the trading A/c & will also be
deducted from the capital on the liabilities side of the balance sheet as drawings.
(xviii) Managers commission on net profit: Sometimes, in addition to his regular salary, the
manager is entitled to a commission on net profit. This is done to induce him to take more interest in
the business. Since the commission is always calculated at the end of the accounting period, it is
treated as outstanding expenses.
Treatment in final accounts: On the one hand, it will be recorded on the debit side of P&L A/c
because it is a business expense & on the other hand, shown on the liabilities side as an outstanding
expense.
Method of calculating the commission: This commission may be based:

(a) On profits before charging such commission.
(b) On profits after charging such commission
(a) On profits before charging such commission: Suppose, the profit earned by the firm before
allowing the managers commission is ` 22000 and the manager is entitled to a commission of 10%
on net profit before charging his commission, the commission will be calculated as follows:
Managers commission = 22000 x 10 = ` 2200
100
(b) On profits after charging such commission: Suppose, the profit earned by the firm before
allowing the managers commission is ` 22000 and the manager is entitled to a commission of 10%
on net profit remaining finally after charging his commission, the commission will be calculated as
follows:
Managers commission = 22000 x 10 = ` 2000

110
Illustration: 5 Year 2014

Following balances have been extracted from the books of Shri Ram Rayons on 31st March 2011:-

Contact: 9829959536,7737733360,9928001210 5.12
Opening stock Rs. 15,000; Purchases Rs. 50,000; Sales Rs. 80,000; Return Inward Rs. 300; Return
Outward Rs. 2,000; Debtors Rs. 40,500; Fixed deposit in Bank Rs. 10,000; Creditors Rs. 25,000;
B/RRs. 11,400; B/P Rs. 8,000; Interest received on Fixed deposit Rs. 900; Drawings Rs. 6,300; Cash
Rs 1,000; Capital Rs. 37,300; Discount (Dr.) Rs. 600; Commission (Cr) Rs. 2200; Repairs Rs. 800;
Wages Rs. 2,400; Salaries for 11 months Rs. 5,500; Advertisement Rs. 1,200; Trademark Rs. 1,500;
Building Rs. 10,000; Bad debt Rs. 800; Provision for bad debts Rs. 1,900. .
Prepare Final Account for the year under 31st March 2011 after taking into consideration of
following adjustments:
(1) Stock on 31st March 2011 Rs. 28,400.

(2) Interest accrued on fixed deposit in Bank for 3 months, commission received in advance Rs 400.
(3) Further bad debts Rs. 500 and maintain provision for bad debts at 5% on debtors.
(4) Depreciate building by 5%
(5) Goods worth Rs. 300 were donated for which no entry was made in the books.
(6) Provide for manager's commission 5% on net profit after charging this commission.
Ans: Gross profit = 43000, Net profit = 33524, balance sheet total = 10100
*****

Contact: 9829959536,7737733360,9928001210 5.13

CHP 5 - Financial Statement (With Adjustment)

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CHP 5 - Financial Statement (With Adjustment)

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A unit of Realwaves (P) Ltd FS with Adjustment

CHAPTER 5 FINANCIAL STATEMENT WITH

Example: extracts of trial balance as on 31st December, 04.

Effects on final A/c:

Vidhyadhar Nagar: F – 45, Balaji Tower – I, Behind Vishal Mega Mart.

Example: extracts of trial balance as on 31st Dec, 01

Effects on final A/c:

Effects on final A/c

Vidhyadhar Nagar: F – 45, Balaji Tower – I, Behind Vishal Mega Mart.

Vidhyadhar Nagar: F – 45, Balaji Tower – I, Behind Vishal Mega Mart.

Effects on final A/c:

Example: extracts of trial balance as on 31st Dec, 04

Effects on final A/c:

(vii) Interest on capital:

Vidhyadhar Nagar: F – 45, Balaji Tower – I, Behind Vishal Mega Mart.

Example: extracts of trial balance as on 31st Dec, 03

Effects on final A/c:

Example: extracts of trial balance as on 31st Dec, 03

Effects on final A/c:

Vidhyadhar Nagar: F – 45, Balaji Tower – I, Behind Vishal Mega Mart.

Vidhyadhar Nagar: F – 45, Balaji Tower – I, Behind Vishal Mega Mart.

Example: extracts of trial balance as on 31st Dec, 03

Effects on final A/c:

Example: extracts of trial balance as on 31st Dec, 03

Effects on final A/c:

Vidhyadhar Nagar: F – 45, Balaji Tower – I, Behind Vishal Mega Mart.

Example: extracts of trial balance as on 31st Dec, 04

Name of accounts Dr balance Cr balance

Effects on final A/c:

Vidhyadhar Nagar: F – 45, Balaji Tower – I, Behind Vishal Mega Mart.

Vidhyadhar Nagar: F – 45, Balaji Tower – I, Behind Vishal Mega Mart.

(xiii) Provision for discount on debtors: Year 2010

Example: extracts of trial balance as on 31st Dec, 02

Effects on final A/c: Profit & loss A/c

To provision for discount

Liabilities Amt Assets Amt

Vidhyadhar Nagar: F – 45, Balaji Tower – I, Behind Vishal Mega Mart.

(xiv) Adjustments relating to goods:

Insurance charges 2400 Capital 170000

Vidhyadhar Nagar: F – 45, Balaji Tower – I, Behind Vishal Mega Mart.

(xv) Charity in the form of goods:

(xvi) Goods distributed as free samples:

(xvii) Drawings in goods:

Method of calculating the commission: This commission may be based:

Managers commission = 22000 x 10 = ` 2000

Illustration: 5 Year 2014

Vidhyadhar Nagar: F – 45, Balaji Tower – I, Behind Vishal Mega Mart.

(1) Stock on 31st March 2011 Rs. 28,400.

Vidhyadhar Nagar: F – 45, Balaji Tower – I, Behind Vishal Mega Mart.

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