Chapter - 03 Final Accounts With Adjustments

CHAPTER – 3
Final Accounts (with adjustment)
Learning Objectives
After going through this chapter, students will be able to:
 Describe the meaning and purpose of Adjustments

 Understand the treatment of various adjustments
 Learn the process of making all the necessary adjustments in the financial statements
 Know the process of preparation of complete financial statements
Introduction
Financial Position of a company reflects its position, profitability and existence. It helps different
users of accounting information in taking various decisions. It is the trader who has to ascertain
the trading results and the financial strength and weakness of the concern by preparing such
financial statements. These informations are extracted from trial balance to make a financial
statement. Trial Balance provides various informations as regards to the business transactions but
contains only those transactions which have already been recorded in the books of account and
may not contain the items, such as outstanding expenses, incomes, prepaid expenses and incomes
received in advance, non cash expenses such as provision for doubtful debts etc. There are some
other provisions which are to be accounted for but not contained in the trial balance. Final
accounts prepared without taking all these adjustments in to consideration cannot give the correct
trading results and true picture of the financial position of the concern. It generates the
requirement of adjusting all those unrecorded transactions in the final accounts.
Meaning of Adjustments
Adjustment in final accounts refers to the process of recording all those items which have not
been included in the trial balance. One can termed adjustments as recording different expenses of
the current accounting period which are incurred but not yet paid and certain incomes of the
current period which are earned but not yet received, apportionment of the expenses paid during
the tenure of the current period and incomes received during the current period. It also includes
recording of non-cash expenditures like depreciation on fixed assets, interest on capital, non-cash
incomes like interest on drawings, various provisions for bad debts, discount on debtors etc. The
process of recording and posting the adjustments are through adjusting entries. The journal
entries passed for adjustments at the end of trading period are called Adjusting Entries.
Purpose of Adjustments
The main objectives of recording adjustments are:

 To record all the outstanding transactions relating to the current year whether paid or not.
 To make necessary adjustment towards the prepaid expenses.
 To make the arrangements for all types of unrecorded outstanding incomes pertaining to
the current year
 To record unrecorded business transactions
 To rectify the errors if any incurred during the course of business
 To help in completing the incomplete transactions.
 To calculate true and clear picture of the profit and loss of the business for the current
year
 To depict all the assets and liabilities at their exact values in order to disclose inside the
balance sheet.
Important Adjustments
1. Outstanding Expenses
Expenses incurred but not paid at the end of the year are called outstanding expenses. Every
expense include reciprocal exchange of values in the form of cash, claims to cash, services,
things , right etc. in other words, if certain benefits derived from the operating activities in the
business but payment of those services are due is known as outstanding expenses.
Adjustment Entry
Expenses A/c Dr
To Expenses Outstanding A/c
Treatment:
a. Add with the respective Expenses in the Trading and Profit & Loss Account
b. Shown as a liability in the balance sheet
Example – 1
During the year ended 31 st March, 2017, salaries of the employees amounting to Rs 20,000 for
10 months has been paid but salaries for 2 months of Rs 4,000/- has not been paid. Pass
necessary journal entry and show the treatment on the final accounts.
Solution:
Salaries A/c Dr 2,000
To Outstanding Salary A/c 2,000
(Being salary due for two months not yet paid)
Trading and Profit & Loss Account
For the year ending 31st March 2017
Dr Cr
Particulars Amount Particulars Amount
Rs Rs
To Salary 20,000
Outstanding Salary 4,000 24,000
Balance Sheet
As on 31st March, 2017
Liabilities Amount Assets Amount
Rs Rs
Outstanding Salary 4,000
2. Prepaid Expenses:
Prepaid Expenses refer to the expenses paid in advance during the accounting year. These are the
payment paid in advance for the services to be received in the next accounting period. Prepaid
expenses amount is deducted from particular expense account on the debit side of trading or
profit & loss account and posted in the assets side of the balance sheet.
Adjustment Entry
Prepaid Expenses A/c Dr
To Expenses A/c
(Being the expenses in advance)
Treatment in Final Accounts:
1. Subtracted from the concerned expenses in the Trading and Profit & Loss Account
2. Shown in the Assets side of the Balance Sheet
Example – 2
Insurance Premium of Rs 10,000 has been paid on 1st of July 2016 for the financial year 2016-
17. Pass the necessary journal entry and show the treatment in the final accounts assuming that
the year ended 31st March each year.
Solution:
Prepaid Insurance A/c Dr 2,500
To Insurance A/c 2,500
(Being the amount of insurance premium paid in advance)
Dr Cr
Rs Rs
To Insurance 10,000
Less: Prepaid Insurance 2,500 7,500
(Rs 10,000 x 3/12)

Balance Sheet
Rs Rs
Prepaid Insurance 2,500
3. Accrued Income:
Accrued Income refers to the income earned or due but not received during the current
accounting year. It is considered as current assets. It is credited to profit and loss account and
posted in the balance sheet assets side.
Adjustment Entry:
Accrued Income A/c Dr
To Income A/c
(Being the income accrued or earned but not yet received during the year)
1. Add with the respective income in the Trading and Profit & Loss Account
2. Shown as an Asset in the Balance Sheet
Example – 3
Interest received during the year on investment was Rs 5000. Interest earned but not received
during the financial year 2016-17 amounted to Rs 700. Pass necessary adjustment entries and
posted in the appropriate places in the final accounts.
Solution:
Accrued Interest A/c Dr 700
To Interest A/c 700

(Being the amount of interest accrued or earned but not yet received during the year)

Dr Cr
Rs Rs
By Interest A/c 5,000
Add: Accrued Interest 700 5,700
Balance Sheet
Rs Rs
Accrued Interest 700
4. Income received in Advance
It refers to income received in the current year against which services are to be provided in the
next accounting year. In other words, incomes are received in advance before the income is
earned. Income received in advance is subtracted from the amount of interest received in the
profit & loss account and shown as a liability in the balance sheet.
Adjustment Entry:
Income Received A/c Dr
To Income Received in Advance A/c
(Being the amount received in advance adjusted)
Treatment in Final Accounts
1. Subtracted from the income received in Profit & Loss Account

2. Shown in the liability side of the balance sheet
Example – 4
Commission received during the year 2016-17 amounted to Rs 5,300. Commission received in
advance was Rs 2,300. Pass the required journal entries and show its treatment in final accounts
assuming that accounts are closed on 31st March each year.
Solution
Profit & Loss Account

Dr Cr
Rs Rs
By Commission A/c 5,300
Less:
Commission received in advance 2.300 2,000
Balance Sheet
Rs Rs
Commission received in advance 2,300
5. Depreciation:
Depreciation is an expenses caused due to wear and tear, regular usage of fixed assets during the
course of a business. This is a non-cash expense. The portion of depreciation is transferred to
profit and loss account each year and subtracted from the respective assets in the balance sheet.
Adjustment Entry
Depreciation A/c Dr
To Fixed Assets A/c
(Being depreciation charged on fixed assets)
1. Posted in the Profit & Loss Account Debit Side as an expenditure

2. Subtracted from the concerned assets in the assets side of the balance sheet
Example – 5
The Trial Balance of JPR Traders as on 31st March, 2017 shows the following particulars:
Trial Balance of JPR Traders
as on 31st March, 2017
Particulars Amount Amount
Machinery 2,50,000
Furniture 1,00,000
Land & Building 4,00,000
Adjustments: Depreciation is charged @ 10% p.a. Pass necessary journal entries and their
respective posting in the final accounts.
Solution:
Depreciation A/c Dr 75,000
To Machinery A/c 25,000

To Furniture A/c 10,000
To Land & Building A/c 40,000
(Being depreciation charged on machinery, furniture and building)

Dr Cr
Rs Rs
To Depreciation
Machinery 25,000
Furniture 10,000
Land & Building 40,000 75,000
Balance Sheet
Rs Rs
Fixed Assets
Machinery 2,50,000
(-) Depreciation 25,000 2,25,000
Furniture 1,00,000
(-) Depreciation 10,000 90,000
(-) Depreciation 40,000 3,60,000
6. Closing Stock
The word closing stock refers to the value of goods unsold during the course of business.
Generally, closing stock is calculated at the end of the year. Closing stock helps in calculation of
cost of goods sold and gross profit. According to Accounting Standard – 2 (As – 2 Revised),
inventories should be valued at cost or net realizable value whichever is less. Opening and
Closing Stocks can be adjusted with the purchase account. In this case, purchase is termed as
Adjusted Purchase. Closing stock is transferred to the Trading Account and posted in the assets
side of the balance sheet as a current asset.
Adjustment Entry:
Closing Stock A/c Dr
To Trading A/c
(Being closing stock is valued at the end of the accounting year)
1. Closing is shown in the credit side of the Trading Account

2. It is shown in the assets side of the balance sheet as a current asset
Example – 6
On 31st March 2017, the closing stock is valued at Rs 10,500. Pass journal entries and give its
treatment in final accounts.
Solution:

Dr Cr
Rs Rs
By Closing Stock A/c 10,500
Balance Sheet
Rs Rs
Closing Stock 10,500
Example – 7 (If closing stock appears inside the Trial Balance)
Trial Balance
Show the treatment of the closing stock in final accounts.
Balance Sheet
Rs Rs
Example – 8
From the following trial balance of Jagannath Traders, Prepare Trading and Profit and
Loss Account with Balance Sheet for the year ending on 31 st March, 2017.
Particulars Amount (Dr) Amount (Cr)
Capital 14,500
Plant & Machinery 14,000

Sundry Debtors and Creditors 1,200 600
Purchases 5,250
Wages 2,500
Bank 500
Repair 25
Stock 1,000
Return Outward
Rent 200 250
Sales
Manufacturing Expenses 400 8,200
Trade Expenses 350
Bad Debts 100
Carriage Inward 75
Bills Payable
Return Inward 200 250
Interest
Insurance 3,500 3,000
Commission
2,500
29,300 29,300
1. The closing stock was valued at Rs 1,450.

2. Outstanding Wages was Rs 200.
3. Prepaid Insurance Rs 150
4. Accrued Interest Rs 100
5. Commission received in advance Rs 500
Solution
Trading and Profit & Loss Account of Jagannath Traders
For the year ended 31st March, 2017
Dr Cr
Particular Amount Particular Amount
To Opening Stock 1,000 By Sales 8,200
To Purchases 5,250 Less- Return Inward 200 8,000
Less: Return Outward 250 5,000 By Closing Stock 1,450
To Wages 2,500
Add: Outstanding Wages 200 2,700
To Man. Expenses 400
To Carriage Inward 75
To Gross Profit c/d 275
9,450 9,450
To Repair 25 By Gross Profit b/d 275
To Trade Expenses 350 By Interest 3,000
To Rent 200 Add: Accrued Interest 100 3,100
To Bad debts 100
To Insurance 3,500
Less: prepaid insurance 150 3,350 By Commission 2,500
Less: Commission
received in advance 500 2,000
To Net Profit c/d 1,350
(Transferred to Capital)
5,375 5,375
Balance Sheet of Jagannath Traders
Sundry Creditors 600 Bank 500
Bills Payable 250 Sundry Debtors 1,200
Outstanding Wages 200 Closing Stock 1,450
Commission received in advance 500 Accrued Interest 100
Capital 14,500 Prepaid Insurance 150
Add- Net profit 1,350 Plant & Machinery 14,000
15,850
17,400 17,400
7. Bad debts:
Bad debts are the expenses generated due to the unsecured credit sales. It is a case of non-
payment of the credit sale made to the customers. It is debited to the profit and loss account and
reduces the balance of sundry debtors in the balance sheet.
Bad Debts A/c Dr

To Sundry Debtors A/c
(Being the amount due to debtors become bad debt)
Adjustment Entry:
1. The amount of bad debt is will be shown in the debit side of the Profit & Loss Account.
2. The amount of bad debts shall be subtracted from the amount of Sundry Debtors or
Debtors as shown in the assets side of the balance sheet.
Example – 9
The following figures were extracted from the Trial Balance of Gurumurty Traders as on 31 st
March, 2017.
Trial Balance
Sundry Debtors 42,000
Bad Debts 1,000
Adjustments:
Further bad debts amounted to Rs 2,000. You are required to pass necessary adjustment entries
and show its accounting treatment in final accounts.
Solution
Adjustment Entry
Bad Debts A/c Dr 2,000
To Sundry Debtors A/c 2,000
(Being the amount due to debtors become bad debt)

Dr Cr
Rs Rs
To Bad debt 2,000
Add: Further bad debt 1,000 3,000
Balance Sheet
Rs Rs
Less: Further bad debts 2,000 40,000
8. Provision for doubtful debts:
Bad debt generates in case of non-recovery of the amount due from the customers or debtors
during the course of business. But at the end of the financial year, there are some debts which are
not bad but likely to become bad due to many reasons. In order to face this type of situation, a
special provision is created termed as provision for doubtful debts. Provision for doubtful debts
is created to keep a part of the profit separate to meet the expected threat of future losses due to
bad debts. It is to be calculated as a given percentage of the amount of sundry debtors after
making due adjustment of further bad debts. It is debited to the profit and loss account. The
provision such created are to be subtracted from the amount of sundry debtors in the assets side
of the balance sheet.
Adjustment Entry
There are possibilities of happening of two situations i.e. (a) Provision for Doubtful debts
provided inside the Trial Balance and (b) Provision for doubtful debts given as adjustments.
Provision for doubtful debts appearing in the Trial Balance
When provision for doubtful debts is provided inside the trial balance, it is regarded as old
provision. Such old provision is subtracted from the amount of new provision created as a
percentage on debtors in profit and loss account. If the old provision is more than that of new
provision, the new provision will get deducted from the old provision in the Profit & Loss
Account, credit side.
When new provision is more
When new provision is more than that of the old provision, the difference between these two
(New Provision – Old Provision) are to be debited in the profit & loss account. In this situation,
the following journal entries are to be passed.
Accounting Entry
(a) For adjusting bad debts from old provision (old + new)
Provision for doubtful debts A/c Dr
To Bad debts A/c
(Being bad debts written off from old provision)
(b) For creating new provision for doubtful debts
Profit and Loss A/c Dr
To Provision for doubtful debts A/c
(Being provision for doubtful debts or bad debts created with the differential amount)
When new provision is less
In those situations, where new provision created on sundry debtors is less than that of the old
provision appearing in the Trial Balance, the difference amount will be credited to the profit &
loss account.
Accounting Entry
(a) For adjusting bad debts from old provision
To Bad Debts A/c
(Being bad debts written off from old provisions)
(b) For writing back the excess provision
To Profit & Loss A/c
(Being provision for doubtful debts written off from the excess provision created)

1. If the new provision is more than that of the old provision, then the difference amount are
to be shown in the debit side of the balance sheet. On the other hand, if the old provision
exceeds that of new provision, then the differential amount is transferred to the credit side
of the profit and loss account.
2. In both the situation, the new provision created will be subtracted from the Sundry
Debtors in the Balance Sheet.
Example – 10
The following figures were extracted from the Trial Balance of Purbasha Pvt. Ltd. as on 31st
March, 2017.
Trial Balance
Sundry Debtors 1,00,000
Bad Debts 2,000
Provision for doubtful debts (01-04-2016) 3,000
Adjustment: Provision for doubtful debts is to be created @ 5% on sundry debtors.
Solution:
Journal Entries
Provision for doubtful debts A/c Dr 2,000
To Bad Debts A/c 2,000
(Being bad debts written off)
Profit & Loss A/c Dr 4,000
To Provision for doubtful debts A/c 4,000

(Being provision for doubtful debts is created with the difference amount)

Dr Cr
Rs Rs
To Bad debt 2,000
Add: New Provision 5,000
Less: Old Provision 3,000 4,000
Balance Sheet
Rs Rs
Less: New Provision 5,000 95,000
Example – 11
The following figures were extracted from the Trial Balance of Alisha Pvt. Ltd. as on 31st March,
2017.
Trial Balance
Bad Debts 2,000
Provision for doubtful debts (01-04-2016) 8,000

Adjustment: Provision for doubtful debts is to be created @ 5% on sundry debtors.
Solution:
Journal Entries
To Bad Debts A/c 2,000
(Being bad debts written off)
To Provision for doubtful debts A/c 5,000

To Profit & Loss A/c 1,000
(Being the excess amount of provision written back)

Dr Cr
Rs Rs
By old provision
for doubtful debts 8,000
Less: Bad debts 2,000
6,000
Less: New provision 5,000 1,000
Balance Sheet
Rs Rs

Example -12
From the following trial balance of Rubina Variety Store, Prepare Trading and Profit and
Particulars Amount (Dr) Amount (Cr)
Plant & Machinery 2,00,000
Land & Buildings 3,70,000
Cash in hand 30,000
Cash at Bank 1,00,000
Opening Stock 50,000
Purchase 2,25,000
Sales 4,20,000
Carriage Inward 3,000
Carriage Outward 4,000
Rent 6,000
Salary 5,000
Insurance 2,300
Interest on Loan 18,000
Commission 2,700
Wages 1,500
Bills payable 20,500
Creditors 3,50,000
Return Inward 10,000
Return Outward 15,000
Loan 1,80,000
Capital 1,87,000
Provision for doubtful debts 1,600
11,76,,800 11,76,800
Adjustments:

2. Prepaid Insurance Rs 300
3. Bad debts amounted to Rs 2,000.
4. Create a provision for doubtful debts @ 5%.
5. Depreciation is charged @10% p.a. on Plant & Machinery and Land & Building.
Solution
Trading and Profit & Loss Account of Rubina Variety Store
Dr Cr
To Opening Stock 50,000 By Sales 4,20,000
To Purchases 2,25,000 Less- Return Inward 10,000 4,10,000
Less: Return Outward 15,000 2,10,000
By Closing Stock 70,000
To Wages 1,500
To Carriage Inward 3,000

To Gross Profit c/d 2,15,500
4,80,000 4,80,000
To Carriage outward 4,000
To Rent 6,000
To Salary 5,000 By Gross Profit b/d 2,15,500
To Interest on Loan 18,000
To Insurance 2,300
Less: prepaid insurance 300 2,000 By Commission 2,700
To Bad debts 2,000
Depreciation on:
To Net Profit c/d 1,18,300
(Transferred to Capital)
2,18,200 2,18,200
Balance Sheet of Rubina Variety Store

Cash in hand 30,000
Sundry Creditors 3,50,000 Cash at Bank 1,00,000
Bills Payable 20,500 Sundry Debtors 1,52,000
Loan 1,80,000 Less: Bad debts 2,000
1,50,000
Capital 1,87,000 Less: New Provision 7,500 1,42,500
Add- Net profit 1,18,300 3,05,300
Prepaid Insurance 300
Less: depreciation 20,000 1,80,000
Land & Buildings 3,70,000
Less: Depreciation 37,000 3,33,000
8,55,800 8,55,800
9. Provision for discount on debtors

This is the amount which is created to consider the discount to be allowed to debtors for the
quick payment. The amount for such discount on debtors is calculated on the balance amount of
debtors after subtracting the amount of provision for doubtful debts. This amount so calculated is
debited to profit and loss account and subtracted from the amount of balanced sundry debtors.
Adjustment Entry
Profit and Loss A/c Dr
To Provision for discount on debtors A/c

(Being the provision made for discount on debtors)

1. Shown in the debit side of the profit & loss account as an indirect expenses
2. It will be deducted from the amount of Sundry Debtors in the assets side of the balance
sheet
Example – 13
From the following Trial Balance of Madhu Bhandar Pvt. Ltd., pass the required journal entries
and show their respective treatment in the final accounts.
Trial Balance
Bad Debts 4,000
Adjustments:
1. Write off further bad debts Rs 2,000
2. Provision for doubtful debts is to be created @ 5% on sundry debtors.
3. Provision for discount on debtors is to be charged at 3%.
Solution:
Adjustment Entries:
Profit & Loss A/c Dr
To Provision for discount on debtors A/c
(Being the provision made for discount on debtors)

Dr Cr
Rs Rs
To Bad debt 4,000
Add: Further Bad debt 2,000
To Provision for discount n debtors A/c

(3% on Rs 1,14,000) 3,420
Balance Sheet
Rs Rs
Less: New Provision 2,000

1,20,000
Less: New Provision 6,000
1,14,000
Less: Provision for
Discount on debtors 3,420 1,10,580
Working Notes
1. Calculation of New provision for doubtful debts

Total Sundry Debtors Rs 1,22,000
(-) Further Bad Debts Rs 2,000
Rs 1,20,000
New Provision for doubtful debts = Rs 1,20,000 x 5% = Rs 6,000
2. Calculation of provision for discount on debtors
Total Sundry Debtors Rs 1,22,000

(-) Further Bad Debts Rs 2,000
Rs 1,20,000
(-) New Provision for doubtful debts Rs 6,000
Rs 1,14,000
Provision for discount on debtors = Rs 1,14,000 x 3% = Rs 3,420
10. Drawings:
Drawings represent the withdrawal of goods or cash by the owner for personal use. It can be in
the form of meeting personal expenses of the owner by making the payment from business
account. It is treated as an expense and debited to the profit and loss account. In other words, it
refers to the utilization of business resources for the private use of the owner. It includes personal
expenses paid from the business account such as life insurance premium, income tax, tuition fees
of children etc. The amount of drawings is subtracted from the final balance of capital in the
liability of the balance sheet.
Adjustment Entry:
Drawings A/c Dr
To Capital A/c
(Being the amount of drawing transferred to capital account)
1. Shown in the debit side of the profit & loss account as expenses.
2. Subtracted from the capital in the liabilities side of the balance sheet
Example – 14
From the following particulars, pass the required journal entries and posted them in to final
accounts.
Trial Balance
Drawings 2,000
Capital 1,05,000
Adjustments:
1. Withdrawal by the proprietor for personal use during the financial year 2016-17
amounted to Rs 3,000.
Solution
Adjustment Entries
Drawings A/c Dr 3,000
To Capital A/c 3,000

Dr Cr
Rs Rs
To Drawings 2,000
Add: Additional Drawings 3,000 5,000
Balance Sheet
Rs Rs
Capital 1,05,000
Less: Drawings 3,000 1,02,000
11. Interest on Capital:
Interest on Capital is the amount charged to the debit side of the profit and loss account as an
adjustment to calculate the true profit of the business for the accounting period. This amount
enhances the value of capital.
Adjustment Entry
Interest on Capital A/c Dr
To Capital A/c
(Being the amount of interest credited to the capital account)
1. Shown in the Profit & Loss Account as an expenses

2. Add with the amount of capital in the assets side of the balance sheet
Example – 15
accounts.
Trial Balance
Drawings 5,000
Capital 1,50,000
Adjustments:
2. Interest charged on capital @ 10% p.a.
Solution
Adjustment Entries
1. Drawings A/c Dr 3,000

2. Interest on Capital A/c Dr 15,000

Dr Cr
Rs Rs
To Drawings 5,000
Interest on capital 15,000

(Rs 1,50,000 x 10%)
Balance Sheet
Rs Rs
Capital 1,50,000
Less: Drawings 2,000
1,48,000
Add:
Interest on capital 15,000 1,63,000
12. Interest on Drawings:

Drawings are treated as expenses and interest on drawings is considered reversely as a business
income. It is credited to the profit and loss account as an income and subtracted from the balance
of capital in the balance sheet liability side.
Adjustment Entry
Drawings A/c Dr
To Interest on Drawings A/c
(Being the amount of interest on drawings is charged to drawings account)
Example – 16
accounts.
Trial Balance
Drawings 5,000
Capital 1,50,000
Adjustments:
2. Interest charged on capital @ 10% p.a.
3. Charge interest on drawing amounted to Rs 1,500.
Solution:
Adjustment Entries
2. Interest on Capital A/c Dr 15,000
To Interest on Drawings A/c 1,500
(Being the amount of interest on drawings is charged to drawings account)

Dr Cr
Rs Rs
To Drawings 5,000 By Interest on Drawings A/c 1,500
Interest on capital 15,000

(Rs 1,50,000 x 10%)
Balance Sheet
Rs Rs
Capital 1,50,000
Less: Drawings 2,000

1,48,000
Less: Interest on Drawings 1,500
1,46,500
Add:
Interest on capital 15,000 1,61,500
Example – 17
From the following trial balance of Sumitra Pvt. Ltd, Prepare Trading and Profit and Loss
Account with Balance Sheet for the year ending on 31st March, 2017.
Capital 2,16,800
Furniture & Fittings 50,000
Motor Vehicles 40,000
Sundry Creditors 1,15,000
Provision for bad debts 1,200
Purchases and Sales 1,63,000 3,24,000
Bank Overdraft 36,000
Sales and Purchase return 4,000 3,000
Advertisement 16,000
Interest on Bank Overdraft 1,800
Commission 2,000
Cash 10,000
Taxes and Insurance 2,500
General Expenses 1,500
Salaries 12,000
Drawings 6,200
6,98,000 6,98,000
Adjustments:

2. Provide for Depreciation on Land & Building 5%, Furniture & Fittings @10% and Motor
vehicles @ 20%.
3. Salaries Rs 300 was outstanding.
4. Write off a further sum of Rs 1000 as bad debts.
5. Provision for bad debts to be made equal to 10% on Sundry Debtors and Provision for
discount on debtors 2%.
6. Interest on capital amounted to Rs 2,600.
Solution:
Trading and Profit & Loss Account of Sumitra Pvt. Ltd
for the year ended 31st March, 2017
Less: Return Outward 3,000 1,60,000 By Closing Stock 25,000

3,45,000 3,45,000
To Bad debts 1,000
Add: New Provision 6,000 By Gross Profit b/d 1,55,000
By Commission 2,000
To Advertisement 16,000
To Interest on Bank Overdraft 1,800
To Taxes and Insurance 2,500
To General Expenses 1,500
To Salaries 12,000
Add: Outstanding 300 12,300
To Depreciation:
Building 5,000
Furniture 8,000
Motor Vehicle 15,000 28,000
To Provision for discount on debtors 1,080
To Interest on Capital 2,600
1,57,000 1,57,000
Balance Sheet of Sumitra Pvt. Ltd

Capital 2,16,800 Furniture 50,000
Less: Drawings 6,200 Less: Depreciation 5,000 45,000
2,10,600 Motor Vehicles 40,000
Add: Interest on capital 2,600 Less: Depreciation 8,000 32,000
2,13,200 Building 3,00,000
Less: Depreciation 15,000 2,85,000
Add: Net Profit 85,420 2,98,620
Less: Bad Debts 1,000
Sundry Creditors 1,15,000 60,000
Bank Overdraft 36,000 Less: New Provision 6,000
54,000
Outstanding Salaries 300 Less: Provision for
discount on debtors 1,080 52,920
Cash 10,000
4,49,920 4,49,920
Manager’s Commission
It may not always possible for all the partners in a partnership firm to devote and provide
sufficient time for operating the business. Managers are appointed to work for the firm in order
to avoid these limitations of time. Managers are basically entitled fixed remuneration payable
monthly in all most all every business enterprise. Besides this remuneration, when the managers
are performing some extra work for the business, they may get some extra incentives in the form
of commission. This is termed as Manager’s Commission. This amount is pad to motivate the
manager and to retail the quality staff in the firm. This is helpful in extracting the best in
managers in many occasions. This system of manager’s commission is adopted in those concerns
where managerial practice is highly implemented in several departments i.e. production, sales,
marketing etc. Generally, this commission is calculated at the end of the accounting and only
paid after the end of the accounting period. That’s why, such commission is treated as an
outstanding expenses and treated accordingly.
Adjustment Entry
Manager’s Commission A/c Dr
To Outstanding Commission A/c
(Being commission due to the managers at the end of the accounting period)
1. It will be shown in the Trading and Profit & Loss Account as an expenses
2. Shown in the liability side of the balance sheet
Methods of calculation of Manager’s Commission
Manager’s commission can be calculated in two different methods i.e. Percentage of Net Profit
before charging commission and Percentage of Net Profit after charging commission. The
commission is calculated as follows:
(a) Commission as a percentage of net profit before charging commission
Commission = Net Profit before commission x Rate of Commission

100
(b) Commission as a percentage of net profit after charging commission
Commission = Net Profit before commission x Rate of Commission

100 + Rate
Example – 17
The net profit of a business firm in the year 2016-17 before charging Manager’s Commission
amounted to Rs 90,000. The Manager is entitled to get 10% p.a. commission on net profit before
charging his commission or rendering extra services to the concern. Pass necessary journal
entries and show the treatment in the final accounts.
Solution
Adjustment Entry
Manager’s Commission A/c Dr 9,000
To Outstanding Commission A/c 9,000
(Being the amount due for manager’s commission)

To Manager’s Commission A/c 9,000
(Being commission charged and transferred to Profit & Loss Account)

Dr Cr
Rs Rs
To Manager’s Commission
(Rs 90,000 x 10%) 9,000
Balance Sheet
Rs Rs
Outstanding Commission 9,000
Example – 18
The profit earned by the firm before providing the Manager’s Commission is Rs 1,10,000. The
Manager is entitled to get a salary of 10% p.a. on Net Profit after charging his commission. Pass
the required journal entries and posted them in to final accounts properly.
Solution:
Adjustment Entry
Manager’s Commission A/c Dr 10,000
To Outstanding Commission A/c 10,000

(Being the amount due for manager’s commission)

To Manager’s Commission A/c 10,000
(Being commission charged and transferred to Profit & Loss Account)

Dr Cr
Rs Rs
To Manager’s Commission
(Rs 1,10,000 x 10/ 110) 10,000
Balance Sheet
Rs Rs
Outstanding Commission 10,000
Abnormal Loss
Abnormal Loss refers to the loss arises due to some unavoidable circumstances in a business. It
can be otherwise stated that all the losses occurred due to natural calamities or hazardous
situations is termed as abnormal losses. It is clear from the examples of various losses due to
theft, loss by fire etc. The accounting records of these losses are different pointed below:
Adjustment Entries
A. Loss of Fixed Assets
Profit & Loss A/c Dr (Total Abnormal Loss)
To Fixed Assets A/c
(Being the amount of loss transferred to profit & loss account)
1. Loss occurred during the year will be shown in the debit side of the profit & loss account
2. The amount of abnormal loss of fixed assets will be deducted from the respective fixed
assets and the net value of the assets shall be presented in the assets side of the balance
sheet.
B. Loss of stock (i.e. by Fire or Theft)
(a) When goods are lost due to accident (Fire):
Loss by fire A/c Dr. (with cost of goods destroyed)

To Trading A/c
(Being goods destroyed due to fire)
(b)
i) If goods were not insured:
Profit and Loss A/c Dr. (with cost of goods destroyed)

To Loss by fire A/c
(Being loss charged to P & L A/c)
ii) If goods were fully insured:
Insurance claim A/c Dr. (With cost of goods destroyed)

To Loss by fire A/c
(Being amount due from insurance company against fire claim)
iii) When goods were partially insured

Profit and Loss A/c Dr. (Part of claim not accepted)
Insurance claim A/c. Dr. (Part of claim accepted)
To Loss by fire A/c. (Total value of goods lost)
(Being claim accepted for loss and balance transferred to P & A/c.)
1. The amount of goods lost by fire will be subtracted from the amount of purchase on the
debits side of the Trading Account or can also be shown on the credit side of the trading
account instead.
2. The claim amount accepted by the insurance company will be shown on the assets side of the
balance sheet.
Example – 19
On 20th of March, 2017 stock worth Rs 10,000 was destroyed by fire. The stock was insured and
insurance company accepted a claim of Rs 8,200 only. Pass all the necessary journal entries in
the books of accounts and posted them in to the final accounts.
Solution
(i) Loss by Fire A/c Dr 10,000
To Trading A/c 10,000
(Being the loss of stock of fire occurred)
Insurance Company A/c Dr 8,200
(ii) Profit & Loss A/c Dr 1,800
To Loss by Fire A/c 10,000
(Being insurance company admitted the claim partially)
Trading Account

Dr Cr
Rs Rs
By Loss by Fire A/c 10,000

Dr Cr
Rs Rs
To Loss by Fire A/c 10,000
Less: Insurance Claim 8,200 1,800
Balance Sheet
Rs Rs
Claim due from Insurance

Company
Goods distributed as Free Samples
The main motive of every business firm is to earn more and more profit. It can be possible by the
increased volume of sales. Advertisement is regarded as one of the primary tool for promoting
sales. There are many business undertakings distribute number of samples of their product on
free basis to promote sales. This is regarded as an indirect expense and shown under the head
advertisement. In such a case, the total expenditures incurred for free samples distributions are
debited as Advertisement account and the purchase account is credited.
Adjustment Entry
Advertisement A/c Dr
To Purchase A/c
(Being goods distributed as free samples)
1. The amount of advertisement (cost of free samples) will be subtracted from the purchase
in the debit side of the trading account.
2. The amount debited as advertisement will be shown in the profit & loss account as
Advertisement.
Example – 20
From the following information extracted from the Trial Balance of Rubina Variety Store, pass
necessary journal entries and show their treatment in final accounts.
Trial Balance
Purchases 1,50,000
Adjustments:
(i) Goods worth Rs 5,000 were distributed as free samples to promote sales.
Solution
Adjustment Entries
(i) Advertisement A/c Dr 5,000
To Purchase A/c 5,000
(Being goods distributed as free samples)
(ii) Profit & Loss A/c Dr 5,000

To Advertisements A/c 5,000
(Being the amount of advertisement transferred to Profit and loss A/c)
Trading Account
Dr Cr
Rs Rs
Purchases 1,50,000
Less:
Goods distributed as free
Samples 5,000 1,45,000

Dr Cr
Rs Rs
To Advertisement A/c 5,000
Hidden Adjustments
There are some transactions remain unidentified during the normal course of maintaining
accounting records of a business concern. Interest on loan and interest on investment are the
examples of such hidden adjustments need to be recorded duly.
Interest on Loan
Loan taken by the business firm is regarded as liability of the concern. Loan taken from bank or
any other source must carry a specified rate of interest. The entire amount of loan and interest
charged there on are required to be presented in the Trial Balance. But sometime, the interest
paid shown in the trial balance may differ from the entire interest payable on the total amount of
loan. In such a situation, adjustment entries are to be passed to record the unrecorded portion of
interest due in the Profit & Loss Account and Balance Sheet.
Adjustment Entry
Interest on Loan A/c Dr
To Outstanding Interest A/c
(Being interest due on loan)
1. Add with the interest paid in the debits side of the profit & loss account
2. Shown in the liability side of the balance sheet.
Example – 21
The following information is extracted from the Trial Balance of Amaranath Co. Ltd. as on
31st March 2017.
Trial Balance

Interest on Loan 900
12% Loan from SBI Phulbani 15,000
Adjustment: Loan was taken on 01-01-2016. Give necessary journal entry and show how it will
appear in the final accounts.
Solution:
Adjustment Entries
Interest on Loan A/c Dr 900
To Outstanding Interest A/c 900
(Being interest due on loan)

Dr Cr
Rs Rs
To Interest on Loan A/c 900
Add: Outstanding Interest 900 1,800
Balance Sheet
Rs Rs
12% Loan from SBI Phulbani 15,000
Outstanding Interest 900

Working Notes:
Interest payable = Rs 15,000 x 12% = Rs 1,800
Interest Paid = Rs 900
Interest Outstanding = Rs 1,800 – Rs 900 = Rs 900
Treatment of Accounting Errors during the preparation of Final Accounts
There are number of errors occurred during the course of business. These errors require
adjustments to be made in the final accounts at the end of the financial year. Some of these are
described below:
1. Goods sent on approval, wrongly treated as sales.
In certain cases, business firms are sending goods to their potential and valued customers on sale
or return basis. These goods should not be considered and treated as sales till the acceptance
made by the customer. The adjustment entry passed in this regard is given below:
Adjustment Entry
Customer’s A/c Dr. (with selling price of goods sent on approval)
To Sales A/c
(Being goods sent to customer on sale or return)
In case the approval is not made till the end of the financial year
Adjustment Entry
(a) Sales A/c Dr (with selling price of goods awaiting approval)

To Customers A/c
(Being sales not effected, approval still awaited)
(b) Closing Stock A/c. Dr. (with cost price of goods still awaiting approval)
To Trading A/ c
(Being stock on approval included in closing stock at cost)
(i) Selling price of goods sent on approval is deducted from sales on the credit side of trading
account.
(ii) Sundry debtors are reduced in balance sheet with the selling price of goods on approval
still awaiting approval.
(iii) The cost of goods still awaiting approval is added to closing stock on credit side of trading
account.
(iv) The cost of goods still awaiting approval is also added to closing stock on asset side of
balance sheet.
2. Goods used for domestic purposes wrongly treated as sales:
There are some errors occurred when the owner or proprietor of the business withdraws or uses
a portion of the goods from his business for his personal use but wrongly recorded as sale. Such
mistakes or errors are to be rectified before the preparation of final accounts.
Adjustment Entries
Sales A/c Dr (With selling price of goods already taken into consideration)
To Debtors A/c
(Being wrong entry for credit sale reversed)
Following entry should be passed for effecting drawings in goods :-
Drawings A/c Dr (with cost price of goods withdrawn)
To Purchases A/c
(Being goods taken by proprietor for personal use)
i) Selling price of such goods should be deducted from sales on credit side of trading account.
ii) Debtors in balance sheet are also to be reduced with the selling price of such goods.
iii) The cost of goods taken for domestic use should be deducted from purchases on debit side of
trading account.
iv) The cost of goods taken for domestic use should also be deducted from capital on the
liabilities side of balance sheet.
3. Bad debts recovered but included in sundry creditors:
Sometimes, bad debts which were written-off in previous years are recovered but wrongly
credited to sundry creditor’s account. This error can be rectified by passing the following
adjustment entries:
Adjustment Entries
Sundry Creditors A/c Dr
To Bad debts recovered A/c
(Being bad debts recovered wrongly credited to creditors account rectified)
(i) Bad debts recovered being gain will be recorded on the credit side of profit and loss account.
(ii) Same amount is also deducted from sundry creditors in the liabilities side of balance sheet.
4. Assets sold but treated as sales:
Sometimes, old or obsolete assets are sold by the traders. The amount received from the sale
proceeds of such assets should be credited to respective asset’s account but instead of assets
account, the amount may be transferred to the credit of sales account. This error can be rectified
by passing the following adjustment entry:
Sales A/c Dr (with sale amount of asset)

To Particular Asset A/c
(Being sale of asset wrongly credited to sales account instead of asset account, now corrected)
(i) The amount of sale proceeds of asset should be deducted from sales on the credit side
of trading account.
(ii) Same amount should also be deducted from particular asset account in the balance
sheet.
5. Goods purchased but in transit:
In a business, transportation plays an important part. But, sometimes, the purchased commodities
may not reach the destination till the last date of accounting period. In such a situation, goods are
regarded to be held in transit. Such goods are termed as ‘Goods-in-transit’. It can be recorded by
passing adjustment entries as follows:
Adjusting Entry:
Goods-in-transit A/c Dr
To Sundry Creditors A/c
(Being goods purchased but in transit)
(i) ‘Goods-in-transit’ will be recorded on the asset side of balance sheet.

(ii) Same amount will also be added to sundry creditors on the liabilities side of balance sheet.
6. Goods sold but not delivered to customer:
Sometimes, in a business firm, some goods have been sold on the last date of accounting period
the delivery of goods is yet to be made while the entry for sale has already been recorded in the
books of accounts. At the time of preparing final accounts, these goods should not be included in
closing stock as these are not related with the business operation. So, the amount of these goods
sold are to be deducted from the total value of closing stock.
(i) The value of these goods should be deducted out of total value of closing stock in the credit
side of trading account.
(ii) Same amount should also be deducted from closing stock on the asset side of balance sheet.
7. Goods sold and delivered to customer but no entries passed in the books of accounts:
It is the primary work of any business to sale the goods to its customers at reasonable prices and
delivers the same to the customers place in time. In the books of accounts, the amount such sold
are to be properly recorded. In case the amount of sale in not recorded duly in the books of
accounts in the financial year, t is considered as an accounting error. These errors can be
rectified by passing the following entries before preparation of final accounts of the business.
Adjustment Entry
Sundry Debtor (customer) A/c Dr

To Sales A/c
(Being goods sold on credit)

(i) The amount of such sale should be added to sales on the credit side of trading account.
(ii) Same amount should also be added to sundry debtors on the assets side of balance
sheet.
Treatment of Items of Adjustment appearing outside the Trial Balance:
Sl. Items of Adjusting Entry Treatment Treatment in Treatment

No. Adjustment in Trading P & L A/c. in Balance
A/c. Sheet
1. Closing Stock Closing Stock Dr. Shown on X Shown on
To Trading A/c. the Credit the assets
side side a
Current
Asset.
2. Outstanding Respective Added to Added to the Shown on
Expense Expenses A/c. the respective the
respective indirect liabilities
direct expense on side as a
expense on the debit side Current
the debt Liability
side.
3. Prepaid Prepaid Expenses Dr. Deducted Deducted Shown on
Expenses. A/c. from the from the the assets
(Unexpired To respective respective respective side as a
Expenses) Expense A/c. direct indirect Current
expense on expense on Asset.
the debit the debit side.
side
4. Accrued but out Accrued Income Dr. X Added to the Shown on
received or A/c. respective the asset
Outstanding To Respective income on the side as a
Income) Income A/c. credit side. Current
Asset
5. Income Respective Income Dr. X Deducted Shown on
Received in A/c. from the the
advance or To Unearned respective liabilities
Unearned Income A/c. income on the side as a
Income credit side Current
Liability
6 Depreciation Depreciation A/c. .Dr. x Shown on the Shown on
To respective Asset debt side as a the assets
A/c. separate item. side by way
of
deduction
from the
value of
respective
fixed asset.
7. Interest on Interest on Capital Dr. x Shown on the Shown on
Capital A/c. debit side as a the
To Capital A.c separate item. liabilities
side by way
of addition
to the
Capital
8 Interest on Capital A/c. Dr. x Shown on the Shown on
Drawings To Interest on credit side as liabilities
Drawing A/c. a separate side by way
item of
deduction
from the
Capital.
9 Interest on Interest of Loan Dr. X Shown on the Shown on
Loans A/c. debit side as a the
To Outstanding separate item liabilities
Interest A/c. side under
Current
Liability
10 Interest on Loan & Advances Dr. X Shown on the Shown on
Loans & A/c. credit side the asset
Advances To interest on under Misc side as
Loans & Advances Income additional
A/c. Loan &
Advances
11 Additional Bad Bad Debts A/c. Dr. X Shown on the Shown on
Debts debit side by the assets
way of side by way
addition to of
Bad Debts deduction
given in the of Sundry
Trial Balance Debtors.
(If no
Provision for
Doubtful
Debts is
maintained) or
shown on the
debit side of
Provision for
Doubtful
Debts (If
Provision
Account is
maintained)
12 Provision for P & L A/c. Dr. X Shown on the Shown on
Doubtful Debts To Provision for debit side as a the asset
Doubtful Debts A/c. separate item side way of
deduction
from the
amount of
Sundry
Debtors
13 Provision for P & L A/c. Dr. X Shown on the Shown on
Discount on To Provision for debit side as a the asset
Debtors Discount of Debtors separate item side by way
A/c. of
deduction
from the
amount of
Sundry
Debtors
14 Abnormal Loss Loss of Goods A/c. Dr. X Total value of The amount
of Goods To Trading A/c. irrecovered due
loss of goods insurance
is shown on company is
the debit side shown on
as a separate the assets
item. side as a
Current
Asset
15 Goods Advertisement A/c. Dr. X Added to the x
distributed as To Purchase A/c. Advertisement
Free Samples A/c. in the
debit side.
16 Goods taken by Drawing A/c Dr. X x Added to
the proprietor To Purchases A/c. the
Drawings
which is
deducted
from
Capital in
the
liabilities
side
17 Manager’s Manager’s Dr. X Shown on the Shown on
Commission Commission A/c. debit side as a the
To Outstanding separate item. liabilities
Commission A/c. side as a
current
liability
18 Goods sent on (i) Sales A/c. Dr. Shown on x (i)Shown
Approval To Debtors the credit on the
A/c.(S.P.) Dr. side by assets side
(ii)Stock with way of by way of
Customers A/c. deduction deduction
(Cost) from sales from
To Trading A/c. shown on debtors
the credit (ii)Shown
side by on the
way of assets side
addition of by way of
Closing addition to
stock in- closing
hand stock in-
hand
19 Goods-in-transit Goods in Transit Dr. Shown on x Shown on
A/c. the Credit the assets
side by side by way
way of of addition
addition to (9 closing
closing stock-in-
stock in- hand)
hand
20 Mutual Sundry Creditors Dr. Shown on
Indebtedness A/c. the assets
To Sundry side and
Debtors A/c. liabilities
side and
liabilities
side by way
of
deduction
from
Sundry
Debtors and
Sundry
Creditors
respectively
21 Royalty Payable on Shown on Shown on the Shown on
Production: Trading Dr. the debit debit side (if the
A/c. side (if payable on liabilities
To Royalty A/c. payable on sales) side under
Payable on sales : Dr. production) Outstanding
P& L A/c. Liabilities
To Royalty A/c.
22 Dishonour of Sundry Debtors A/c Dr. x x Shown on
Cheques To Bank A/c. the assets
side by way
of addition
to Sundry
debtors and
deduction
from Bank
A/c.
Treatment of items appearing in the Trial Balance:
Sl. Item given in Trial Treatment in P & L Account Treatment in Balance Sheet
No. Balance or Other Account
1 Closing Stock - Shown on the assets side as a
Current Asset.
2 Outstanding Expenses - Shown on the liabilities side as
a current liability
3 Prepaid Expenses - Shown on the assets side as a
Current Assets
4 Accrued Income - Shown on the asset side as a
Current Asset
5 Income Received in - Shown on the liabilities side as
advance a Current Liability:
6 Depreciation Shown on the debit side o P -
& L A/c as a separate item.
7 Bad Debt. if no Shown on the debit side of P -
Provision for & L A./c as a separate item.
Doubtful Debts A/c.
appears
8 Bad Debts. If Shown on the debit side of -
Provision for Provision for Doubtful Debts
Doubtful Debts A/c. A/c.
appears
9 Discount allowed, if Shown on the debit side of P -
no Provision for & L A/c. as a separate item
Discount on Debtors
A/c. appears
10 Discount allowed, if Shown on the debit side of -
Provision for Provision for Discount on
Discount on Debtors Debtors A/c.
A/c. appears
11 Interest in Capital Shown on the debit side of P -
& L A/c.
12 Interest on Drawings Shown on the credit side of P -
& L A/c.
13 Interest in Loans Shown on the debit side of P -
& L A/c.
14 Interest on Loan and Shown on the credit side of P -
Advances & L A/c.
15 Goods used in the Shown on the debit side of P -
Business & L A/c. as separate item
16 Goods taken by - Added to the drawings which is
Proprietor deducted from Capital in
Liabilities side.
Comprehensive Problems
Illustration – 1
From the following trial balance of Alisha Traders, prepare Trading and Profit and Loss
Account with Balance Sheet for the year ending on 31 st March, 2017.
Cash in hand 6,340
Purchases 81,350
Return Inwards 1,360
Wages 20,960
Fuel & Power 10,300
Carriage on Sales 6,400
Building 60,000
Freehold Land 20,000
Machinery 40,000
Patents 15,000
Salaries 30,000
Insurance 1,200
Drawing 10,490
Sales 1,97,500
Return Outwards 1,000
Sundry Creditors 12,600
Carriage on Purchase 4,080
Capital 1,42,900
3,54,000 3,54,000
Adjustments:

2. Provide for Depreciation on Plant & Machinery 10% and patents @ 20%.
3. Salaries Rs 3,000 is outstanding
4. Wages includes a sum of Rs 4,000 spent on the erection of a cycle shed for employee.
5. Provide for bad debts @ 5% on sundry debtors.
6. Insurance includes a premium of Rs 340 on a policy paid up to 30th September 2017
Solution:
Trading and Profit & Loss Account of Alisha Traders
Dr Cr
To Purchases 81,350 Less- Return Inward 1,360 1,96,140
Less: Return Outward 1,000 80,350 By Closing Stock 17,010
To Wages 20,960
Less: Exp. on erection 4,000 16,960
To Fuel & Power 10,300
To Carriage on Purchase 4,080
To Gross Profit c/d 89,940
2,13,150 2,13,150
To General Expenses 6,000
To Salaries 30,000 By Gross Profit b/d 89,940
Add: Outstanding 3,000 33,000
To Carriage on sales 6,400
To Insurance 1,200
Less: Prepaid 170 1,030
To Prov. for doubtful debts 1,450
To Depreciation:
Machinery 4,000
Patents 3,000
89,940 89,940
Balance Sheet of Alisha Traders
Capital 1,42,900 Building 60,000
Add: Net Profit 35,060 Add: Erection 4,000 64,000
Less: Drawings 10,490 1,67,470 Machinery 40,000
Sundry Creditors 12,600 Less: Depreciation 4,000 36,000
Outstanding Salaries 3,000 Patents 15,000
Less: Depreciation 3,000 12,000
Cash in Hand 6,340
1,83,070 1,83,070
Illustration 2
The trial balance of Bimal Pvt. Ltd as on 31st March, 2017 is as follows:
Particulars Amount (Debit) Amount (Credit)
Cash in hand 2,000

Cash at Bank 3,000
Purchases 1,50,000
Wages 18,000
Fuel & Power 2,700
Building 1,00,000
Freehold Land 1,35,000
Machinery 80,000
Salaries 3,000
Audit Fees 2,200
Insurance 4,000
Drawing 5,000
Sales 2,22,000
Bad debts 1,100
Commission 5,000
Capital 3,11,900

5,61,500 5,61,500
Adjustments:
1. The stock on 31st March, 2017 was valued at Rs 23,000.

2. Provide for Depreciation on Plant & Machinery 5%.
3. Audit Fees due Rs 500.
5. Prepaid Insurance amounted to Rs 600.
Prepare Trading and Profit & Loss Account for the year ended 31 st March, 2017 and Balance
Sheet of Bimal Pvt. Ltd. as at 31st March, 2017.
Solution:
Trading and Profit & Loss Account of Bimal Pvt. Ltd
To Wages 18,000 By Closing Stock 23,000
2.43.000 2,43,000
By Gross Profit b/d 56,100

To Audit Fees 2,200
Add: Outstanding Audit Fees 500 2,700 By Commission 5,000
To Salaries 3,000
To Insurance 4,000
To Depreciation on Machinery 4,000
To Bad debts 1,100
61,100 61,100
Balance Sheet of Bimal Pvt. Ltd
Capital 3,11,900 Building 1,00,000
Add: Net Profit 44,900

Outstanding Audit Fess 500
Cash in Hand 2,000
Cash at Bank 3,000
3,71,800 3,71,800
Illustration 3
The trial balance of Manish as on 31st March, 2017 is as follows:
Furniture 70,000
Cash in hand 10,000
Cash at Bank 22,000
Purchases 1,21,000

Wages 12,000
Fuel & Power 3,000
Printing & Stationery 2,200
Salaries 3,000
Audit Fees 2,000
Insurance 2,400
Drawing 5,000
Sales 2,42,000
Bad debts 1,500
Carriage inward 2,000
Commission 3,000
Interest 1,000
Capital 3,05,800
5,74,400 5,74,400
Adjustments:
Prepare trading, profit and loss account for the year ended 31st March, 2017 and also the balance
sheet as on that date after taking into consideration the following adjustments:
1. Stock on 31st March, 2017 amounted to Rs.17,000.

2. Provide depreciation on land and building @ 5%; on furniture @ 10%; and on plant and
machinery@ 5%.
3. Outstanding salaries amounted to Rs.1,500.
4. Insurance paid up to 30th September, 2017.
5. Write-off bad debts of Rs. 1,300.
6. Reserve for doubtful debts @ 5% of debtors.
7. Goods withdrawn by Manish for personal use Rs.2,000.
Solution:
Trading and Profit & Loss Account of Manish
Less: Return Outward 1,000
1,20,000 By Closing Stock 17,000
To Wages 12,000
To Carriage Inward 2,000
2.58.000 2,58,000
To Audit Fees 2,000 By Gross Profit b/d 1,11,000
To Salaries 3,000
Add: Outstanding Salary 1,500 4,500 By Commission 3,000

To Printing & Stationery 2,200 By Interest 1,000
To Insurance 2,400
Less: Prepaid 1,200 1,200
To Depreciation on
Furniture 7,000
To Bad debts 1,500
Add: Bad debts 1,300
1,15,000 1,15,000
Balance Sheet of Manish
Capital 3,05,800 Land & Building 1,40,000

Add: Net Profit 81,700 Less: Depreciation 7,000 1,33,000
Sundry Creditors 20,000 Plant & Machinery 1,25,000
Outstanding Salaries 1,500 Less: Depreciation 6,250 1,18,750
Furniture 70,000
Less: Bad debts 1,300
39,000
Prepaid Insurance 1,200
Cash in Hand 10,000
Cash at Bank 22,000
4,02,000 4,02,000
Illustration 4:
From the following trial balance of Shibasakti Traders, prepare Trading and Profit and
Capital 5,000
Sundry Debtors and Creditors 1,200 600
Drawings 500
Purchases 5,250
Wages 2,500
Bank 500
Repair 25
Stock 1,000
Return Outward 250
Rent 200
Sales 8,200
Manufacturing Expenses 400
Trade Expenses 350
Bad Debts 100
Carriage 75
Bills Payable 250
Return Inward 200
14,300 14,300

2. Provide for Depreciation on Plant & Machinery Rs 400
3. Allow 5% Interest on Capital
4. Rs 50 is due for repair.
Solution
Trading and Profit & Loss Account of Shibasakti Traders

To Wages 2,500
To Man. Expenses 400
To Carriage 75
To Gross Profit c/d 475
9,450 9,450
To Repair 25 By Gross Profit b/d 475
Add: Due for repair 50 75 By Net Loss 900
To Trade Expenses 350
To Rent 200
To Bad debts 100
To Depreciation on P & M 400
To Interest on Capital 250
(5% 0n Rs 5,000)
1,375 1,375
Balance Sheet of Shibasakti Traders

Sundry Creditors 600 Bank 500
Bills Payable 250 Sundry Debtors 1,200
Outstanding Repair 50 Closing Stock 1,450
Capital 5,000 Plant & Machinery 2,000
Add- Int. on Capital 250 Less: Depreciation 400 1,600
Less: Net Loss 900
Less: Drawing 500 3,650
4,750 4,750
Illustration 5
From the following trial balance of ABC Co. Prepare Trading and Profit and Loss Account
with Balance Sheet for the year ending on 31st March, 2017.
Capital 12,500
Furniture & Fittings 640
Motor Vehicles 6,250
Building 7,500
Sundry Debtors and Creditors 3,800 2,500
Provision for bad debts 200
Opening Stock 3,460
Purchases and Sales 5,475 15,450
Bank Overdraft 2,850

Sales and Purchase return 200 125
Advertising 450
Interest on Bank Overdraft 118
Commission 375
Cash 650
Taxes and Insurance 1,250
General Expenses 782
Salaries 3,300
34,000 34,000

2. Provide for Depreciation on Plant & Machinery 5%, Furniture & Fittings @10% and
Motor vehicles @ 20%.
3. Rs 85 is due for interest on Bank Overdraft
4. Salaries Rs 300 and Taxes Rs 120 are outstanding
5. Insurance amounting to Rs 100 is prepaid.
6. One-third of the commission on received is in respect of work to be done next year.
7. Write off a further sum of Rs 100 each as bad debts and provision for bad debts to be
made equal to 10% on Sundry Debtors.
Solution:
Trading and Profit & Loss Account of ABC Co. Ltd

18,500 18,500
To Bad debts 125
Add: New Provision 370
Add: New Bad debts 100
Less: Old Provision 200 395 By Gross Profit b/d 9,690
To Advertisement 450 By Commission 375
To Interest on Bank Overdraft 118 Less: Commission Rec. in Adv. 125 250
Add: Outstanding 85 203
To Taxes and Insurance 1,270
To General Expenses 782
To Salaries 3,300
Add: Outstanding 300 3,600
To Depreciation:
Building 375
Furniture 64
Motor Vehicle 1,250 1,689
Net Profit 1,551
9,940 9,940
Balance Sheet of ABC Co. Ltd
Capital 12,500 Furniture 640
Add: Net Profit 1,551 13,551 Less: Depreciation 64 576
Sundry Creditors 2,500 Motor Vehicles 6,250
Bank Overdraft 2,850 Less: Depreciation 1,250 5,000
Add: Outstanding 85 2,935 Building 7,500
Commission 125 Less: Depreciation 375 7,125
Outstanding Salaries 300
Outstanding Taxes 120 Sundry Debtors 3,800
Less: Bad Debts 370
Less: New Provision 100 3,330
Closing Stock 3,250
Cash 650
20,031 20,031
Illustration 6
From the following trial balance of Senapati Agency, prepare Trading and Profit and Loss
Account with Balance Sheet for the year ending on 31 st March, 2017.

Cash in hand 1,080
Cash at Bank 5,260
Purchases 81,350
Wages 20,960
Fuel & Power 9,460
Building 60,000
Machinery 40,000
Patents 15,000
Salaries 30,000
Insurance 1,200
Drawing 10,490
Sales 1,97,50
Capital 1,42,000
3,53,160 3,53,160
6. Insurance includes a premium of Rs 350 on a policy expiring on 30th September 2017.
Solution:
Trading and Profit & Loss Account of Senapati Agency

To Purchases 81,350 Less- Return Inward 1,360 1,96,200
Less: Return Outward 1,000 80,350 By Closing Stock 13,600
To Wages 20,960
2,09,800 2,09,800
To General Expenses 6,000 By Gross Profit b/d 87,430
To Salaries 30,000
To Insurance 1,200

To Depreciation:
Machinery 4,000
Patents 3,000
Net Profit 32,550
87,430 87,430
Balance Sheet of Senapati Agency
Cash in Hand 1,080

Cash at Bank 5,260
1,79,660 1,79,660
Illustration 7
From the following trial balance of SBR Co. Prepare Trading and Profit and Loss Account
with Balance Sheet for the year ending on 31st March, 2015.
Cash in hand 2,340
Cash at Bank 4,000
Purchases 1,80,000
Wages 22,250
Fuel & Power 9,400
Building 60,000
Machinery 40,000
Patents 15,000
Salaries 30,000
Insurance 1,200
Drawing 10,490
Sales 2,97,500
Capital 1,41,840
4,52,940 4,52,940

6. Insurance includes a premium of R 350 on a policy expiring on 30 th September 2013
Solution:
Trading and Profit & Loss Account of SBR Co. Ltd
Less: Return Outward 1,000 1,80,350 By Closing Stock 12,600
To Wages 20,900

3,08,760 3,08,760
To General Expenses 6,000 By Gross Profit b/d 86,590
To Salaries 30,000
To Insurance 1,200
To Depreciation:
Machinery 4,000
Patents 3,000
Net Profit 31,710
87,590 86,590
Balance Sheet of SBR Co. Ltd

Cash in Hand 1,080
Cash at Bank 5,260
1,78,660 1,78,660
Illustration – 8
The trial balance of Ashok Garment Stores as on 31st March, 2017 is as follows:
Cash in hand 2,000
Cash at Bank 13,000
Purchases 1,42,000
Wages 15,000
Fuel & Power 2,000
Carriage outwards 1,000

Building 1,00,000
Machinery 90,000
Salaries 3,000
Audit Fees 2,000
Insurance 4,000
Drawing 5,000
Sales 2,20,000
Bad debts 1,000
Carriage inwards 2,000
Commission 5,000
Capital 3,31,500
5,79,000 5,79,000
Adjustments:

3. Outstanding Salary amounted to Rs 600.
5. Commission received in advance Rs 800.
6. Manager’s Commission charged @ 10% p.a. after charging his commission.
Prepare Trading and Profit & Loss Account for the year ended 31st March, 2017 and Balance
Sheet of Ashok Garment Stores as at 31st March, 2017.
Solution:
Trading and Profit & Loss Account of Ashok Garments
To Wages 15,000 By Closing Stock 20,000
To Carriage inwards 2,000
2.38.000 2,38,000
To Audit Fees 2,000 By Gross Profit b/d 63,000
To Salaries 3,000
Add: Outstanding Salaries 600 3,600 By Commission 5,000
To Carriage outwards 1,000 Less:
To Insurance 4,000 Commission received in advance 800 4,200
To Depreciation on Machinery 9,000

To Bad debts 1,000
To Manager’s Commission 4,191
67,200 67,200
Balance Sheet of Ashok Garments
Capital 3,31,500 Building 1,00,000
Add: Net Profit 41,909
Outstanding Salaries 600
Commission received in advance 800 Freehold Land 1,40,000
Manager’s Commission 4,191 Sundry Debtors 40,000
Cash in Hand 2,000

Cash at Bank 13,000
3,94,000 3,94,000
Working Notes
Calculation of Manager’s Commission
Manager’s Commission = Net Profit x Rate

100 + Rate
Manager’s Commission = Rs 46,100 x 10 / 110 = Rs 4,191
Important Terms
 Valuation of Closing Stock: Closing stock is valued at cost price or at market price,
whichever is lower.
 Adjustments: Bringing into record all those items which are not included within the
fold of a trial balance.
 Outstanding Expenses: The expenses which are due but not paid are termed as
outstanding expenses.
 Adjusting entry: The journal entry passed for an adjustment is known as adjusting
entry.
 Prepaid Expenses: The expenses which are paid in advance are termed as prepaid
expenses.
 Accrued Income: The Income which is earned but not yet received is known as
accrued income.
 Bad debt: The debt which becomes irrecoverable from customer is known as bad
debt.
 Mutual Indebtedness: When a credit customer (debtor) becomes a creditor for goods
purchased, it amounts to mutual indebtedness.
 Goods-in-transit: When goods are purchased, but neither its delivery is effected nor
invoice is received it amounts to Goods-in-transit.
Model Exercise Questions
GROUP - A
From the following alternatives, write serially the correct answer along with its serial
number against each bit:
1. Credit balance of profit and loss account forms part of:
a. Capital reserve
b. Secret reserve
c. General reserve
d. Specific reserve [CHSE – 2015]
2. Goods given as samples should be credited to
a. Purchases account
b. Profit and loss account
c. Advertisement account
d. Sales account [CHSE – 2015]
3. Income tax paid by a sole trader on his business income should be :
a. Debited to his capital account
b. Credited to his capital account
c. Debited to Trading Account
d. Debited to Profit and Loss Account [CHSE – 2015]
4. Manufacturing Account reveals
a. Net Profit
b. Financial Position
c. Cost of Production
d. Gross Profit [CHSE – 2015,2014]
5. Trade mark is a/an
a. Liquid asset
b. Fictitious asset
c. Intangible asset
d. Current asset [CHSE – 2015,2014]
6. Outstanding rent is a
a. Personal account
b. Representative personal account
c. Real account
d. Nominal account [CHSE – 2015,2014]
7. Balance sheet reveals
a. Net profit
b. Cost of production
c. Gross profit
d. Financial position [CHSE – 2015,2014, 2009]
8. Out of the following, the one which is a liquid asset, is:

a. Cash
b. Sundry Debtors
c. Inventory
d. Prepaid Insurance [CHSE – 2015]
9. An example of fictitious assets is

a. Patent right
b. Prepaid insurance
c. Furniture
d. Investment [CHSE – 2014, 2011]
10. Interest on capital is a/an

a. Asset
b. Liability
c. Income
d. Expense [CHSE – 2016, 2014]
11. Profit and Loss Account reveals:

a. Gross Profit
b. Net Profit
c. Cash Balance
d. Financial Position [CHSE – 2016, 2012]
12. Outstanding Salary is a:

a. Personal Account
b. Real Account
c. Nominal Account
d. Representative Personal Account [CHSE – 2016, 2012]
13. Goodwill is a/an

a. Current Asset
b. Intangible Asset
c. Wasting Asset
d. Liquid Asset [CHSE – 2016, 2013, 2011, 2008]
14. Mine is a:
a. Wasting Asset
b. Intangible asset
c. Fictitious asset
d. Liquid asset [CHSE – 2016]
15. Trading Account reveals

a. Financial position
b. Gross profit
c. Net profit
d. Appropriation of profit [CHSE – 2013, 2011]
16. An example of intangible assets is
a. Machinery
b. Prepaid Insurance
c. Mines
d. Copyright [CHSE – 2013]
17. Prepaid expenses is an example of

a. Fixed assets
b. Liquid Assets
c. Fictitious Assets
d. Intangible Assets [CHSE – 2012]
18. Outstanding Wages Account is a

a. Personal Account
b. Real Account
c. Nominal Account
d. Representative Personal Account [CHSE – 2011]
19. Outstanding Liability is a

a. Personal Account
b. Real Account
c. Representative Personal Account
d. Nominal Account [CHSE – 2009]
20. Net profit is ascertained

a. From Profit & Loss Adjustment Account
b. From Profit & Loss Account
c. Profit or loss on revaluation of assets and liabilities
d. Financial Position as on a particular date [CHSE – 2009]
21. Commission Account is a

a. Personal Account
b. Real Account
c. Nominal Account
d. Representative Personal Account [CHSE – 2008]
22. Closing stock appearing in the trial balance is shown

a. on the credit side of profit and loss account
b. on the credit side of trading account
c. on the assets side of the balance sheet
d. None of the above
23. Fixed assets are
a. Converted into cash within one year
b. Meant for resale
c. Kept in the business for a long period of time
d. All of these
24. Stock is
a. An intangible fixed asset
b. A part of current assets
c. An investment
d. A part of capital
25. A prepayment of insurance premium will appear in
a. Balance sheet on Assets side
b. Profit & Loss Account on Credit side
c. Liability side of the Balance sheet
26. The item discount allowed appearing in Trial Balance is shown
a. On debit side of Profit & Loss Account
b. On credit side of Profit & Loss Account
c. On liabilities side of Balance Sheet
d. On assets side in Balance Sheet
27. In case of sole proprietorship, net profit of the business is
a. Debited to Capital account
b. Credited to Capital Account
c. Added to drawings of the proprietor
d. Shown in the Balance Sheet
28. Closing stock given outside the Trial Balance is shown
a. On debit side of Trading Account
b. Credit side of Trading Account
c. Assets side in Balance Sheet
d. Both (b) and (c)
29. The Manager’s commission payable is shown
a. On debit side of the Profit & Loss Account
b. On liabilities side of the Balance Sheet
c. (a) and (b) both
d. None of these
30. Return outward appearing in Trial Balance are deducted from
a. Return Inward
b. Closing Stock
c. Purchase
d. Sales
31. Salaries and Wages appearing in Trial Balance will be shown
a. On credit side of Trading Account
b. On debit side of Profit & Loss Account
c. On the Assets side of Balance Sheet
d. On the liabilities side of Balance Sheet
32. Wages and salaries appearing in Trial Balance will be shown
a. On credit side of Trading Account
c. On the Assets side of Balance Sheet
d. On the liabilities side of Balance Sheet
33. Profit on sale of investment will be shown
a. On credit side of Profit & Loss Account
c. On assets side in balance sheet
d. On liabilities side in balance sheet
34. Closing stock is valued at
a. Cost Price
b. Selling Price
c. Market Value
d. Cost or market price whichever is less
35. Carriage inward appearing in Trial balance is shown
a. On debit side of Trading Account
b. On credit side of Trading Account
c. On debit side of Profit & Loss Account
d. On assets side of Balance Sheet
36. Wages on installation of Machinery will be
a. Added to wages in Trading Account
b. Subtracted from wages in Trading Account
c. Added to Machinery in balance sheet
d. Both (b) and (c)
37. Provision for doubtful debts Account is
a. Debited to Bad debts Account
b. Debited to Sundry Debtors Account
c. Credited to bad debts account
d. Debited to Profit & Loss Account
38. Loose Tools are
a. Current Assets
b. Intangible Fixed Assets
c. Tangible Fixed Assets
d. None of these
39. Sundry Debtors are
a. Current Liability
b. Current Assets
c. Tangible Fixed Assets
d. Intangible Fixed Assets
40. Accrued Interest on Investment will be shown
a. On credit side of the Profit & Loss Account
b. On Assets side of the Balance Sheet
c. Both (a) and (b)
Answers:
1. General Reserve, 2. Purchases account, 3. Debited to Profit & Loss Account, 4. Cost of
production, 5. Intangible Assets, 6. Representative Personal Account, 7. Financial Position,
8. Cash, 9. Prepaid Insurance, 10. Expenses, 11. Net Profit, 12. Representative Personal
Account, 13. Intangible Assets, 14. Wasting Assets, 15. Gross Profit, 16. Copyright, 17.
Fictitious Assets, 18. Representative Personal Account, 19. Representative Personal
Account, 20. From Profit & Loss Account, 21. Representative Personal Account, 22. On the
assets side of the balance sheet, 23. Kept in the business for a long period of time, 24. A part
of the current assets, 25. Balance sheet on Assets side, 26. On the debit side of the Profit &
Loss Account, 27. Credited to Capital Account, 28. Both (b) and (c), 29. (a) and (b) both,
30. Purchase, 31. On the debit side of the Profit & Loss Account, 32. On the debit side of
the Trading Account, 33. Credit side of the Profit & Loss Account, 34. Cost or market price
whichever is less, 35. On debit side of Trading Account, 36. Both (b) and (c), 37. Debited to
bad debts Account, 38. Tangible Fixed Assets, 39. Current Assets, 40. Both (a) and (b).
2. Answer the following questions within One Word/term each:
(i) Give an example of Intangible Asset. [CHSE – 2016]

(ii) What is the most liquid asset? [CHSE – 2016]
(iii) What does Trading Account reveal? [CHSE – 2016]
(iv) What types of asset is goodwill? [CHSE – 2015]
(v) Name an asset to which depletion method of depreciation is applicable. [CHSE – 2014]
(vi) Give an example of fictitious asset. [CHSE – 2014]
(vii) Give an example of current liability. [CHSE – 2014]
(viii) Give an example of a wasting Asset. [CHSE – 2013]
(ix) The amount realized by the sale of fixed assets or by asset of shares or debenture is
(x) The amount realized by sale of goods or rendering of services is
(xi) The difference between the total revenue and total cost is called
(xii) Liabilities which are payable within a short period of time, ordinarily in a year are
(xiii) An obligation to pay on the happening or non-happening of an uncertain event is
(xiv) A statement prepared with the intention to check and verify the arithmetical accuracy of
the recording and posting of different accounting transactions is
(xv) The process of recording all those items which have not been included in the trial balance
(xvi) Expenses incurred but not paid at the end of the year are called
(xvii) The expenses paid in advance during the accounting year is considered as
(xviii) The income earned or due but not received during the current accounting year is
(xix) The withdrawal of goods or cash by the owner for personal use is treated as
(xx) The resources needed by the business to carry on the operation is known as
Answers: (i) Patents, (ii) Cash, (iii) Gross Profit or Gross Loss, (iv) Intangible Fixed Assets,
(v) Mines, (vi) Preliminary Expenses, (vii) Sundry Creditors, (viii) Oil Well, (ix) Capital
Receipts, (x) Revenue Receipts, (xi) Gross Profit, (xii) Short Term Liabilities, (xiii)
Contingent Liability, (xiv). Trial Balance, (xv). Adjustments, (xvi). Outstanding Expenses,
(xvii). Prepaid Expenses, (xviii). Accrued Income, (xix). Drawings, (xx) Assets
Fill in the blanks
1) Sale of scrap is credited to _________Account. [CHSE – 2015]

2) Where provision for doubtful debts account is maintained, bad debt is debited to
_______account. [CHSE – 2015]
3) Arrangement of Assets and Liabilities either on the basis of permanence or liquidity is
known as ____________of assets and liabilities. [CHSE – 2015]
4) When closing stock appears in the Trial Balance, it is shown only in the ______
[CHSE – 2016]
5) Interest on loan appearing in trial balance is shown in....................
6) Further bad debt is shown in ....................and....................
7) Prepaid Rent is a ....................account.
8) Sales tax collected becomes a ....................of the firm.
9) Adjustments are meant to show ....................income of the organisation.
10) Wages paid for the erection of machine should be debited to....................account.
11) A cloth merchant using cloth for personal use should treat cloth in....................account.
12) Outstanding expense is a....................
13) Salary outstanding is a ....................account.
14) Profit and Loss Account is also known as ……………..statement.
15) Cost of goods sold is the difference between net sales and ……….
16) The item wages and salaries are debited to ………..
17) The account giving overall result of trading is termed as …………..
18) The trading account of a business is used to calculate the …..
19) Gross profit less total expenses is _________.
20) Closing stock appearing in trial balance is shown in ....................
21) Interest on loan appearing in trial balance is shown in ....................
22) Further bad debt is shown in ....................and ....................
23) Prepaid Rent is a ....................account.
24) Sales tax collected becomes a ....................of the firm.
25) Adjustments are meant to show ....................income of the organisation.
26) Wages paid for the erection of machine should be debited to....................account.
Answers: 1. Manufacturing Account, 2. Provision for doubtful debts Account, 3.

Marshalling, 4. Assets Side of the Balance Sheet, 5. Profit & Loss A/c.; 6. Profit & Loss A/c.
and Balance Sheet; 7. Personal; 8. Liability; 9. True; 10. Machine; 11. Purchase; 12.
Liability; 13. Personal, 14. Income, 15. Gross profit, 16. Profit and loss account, 17.
Trading account, 18. Gross profit, 19. Net profit, 20. Balance Sheet; 21. Profit & Loss A/c.; 22.
Profit & Loss A/c. and Balance Sheet; 23. Personal; 24. Liability; 25. True; 26. Machine.
Correct the underlined portion of the following sentences

1. General Reserve is created out of Capital Profit. [CHSE – 2016]
2. Accrued Income is a liability. [CHSE – 2016]
3. If stock at the end appears in the Trial Balance, it is taken to Trading Account.
[CHSE – 2015]
4. General reserve can be utilized for specific purpose. [CHSE – 2014]
5. Revenue profits refer to the profit generated from sale or revaluation of fixed assets,
share premium received profits from forfeiture of issued shares, profits made prior to
incorporation of the company.
6. Capital loss occurs due to sale of some current assets.
7. Financial statement comprises two important statements, the profit and loss account and
Trial Balance.
8. Profit & Loss Account is a financial statement prepared to ascertain the financial position
during the accounting period.
9. Profit & loss Account is otherwise known as Position Statement which reflects the
income or loss arises during a course of time of a business organization.
10. The difference between the total revenue and total cost is called Net profit.
11. Capital profit is the excess of revenue over it and implicit cost of production.
12. Trial Balance is a statement which portrays the financial position of a business at a point
of time.
13. The main objectives of preparing a Profit & Loss Account are to ascertain or estimate the
value of the business and find out the financial status of the concern.
14. Current assets are assets which are acquired for utilization and not for resale.
15. Tangible Assets are those assets which are with us in cash or easily converted into cash
e.g., cash in hand, cash at bank, investments etc.
16. Expenses paid in advance i.e., prepaid expenses, and income earned but not received are
known as Fixed assets.
17. Contingent liabilities refer to those liabilities which are payable within a short period of
time, ordinarily in a year.
18. Expenses incurred but not paid at the end of the year are called prepaid expenses.
19. Unearned Income refers to the income earned or due but not received during the current
accounting year.
20. Interest on Drawing is the amount charged to the debit side of the profit and loss account
as an adjustment to calculate the true profit of the business for the accounting period.
21. Drawings are treated as expenses and interest on drawings is considered reversely as a
business expenses.
22. Bad debts are the expenses generated due to the unsecured credit purchase.
23. Provision for discount on debtors is created in order to compensate the problem of
calculation of the exact amount of bad debts.
24. When a credit customer (debtor) becomes a creditor for goods purchased, it amounts to
bad debts.
25. When goods are purchased, but neither its delivery is effected nor invoice is received it
amounts to Purchase Return.
Answers: 1. Revenue Profit, 2. Assets, 3. Balance Sheet, 4. General, 5. Capital profit, 6.

Fixed Assets, 7. Balance Sheet, 8. Profit & loss level, 9. Income Statement, 10. Gross Profit,
11. Net Profit, 12. Balance Sheet, 13. Balance Sheet, 14. Fixed Assets, 15. Liquid Assets, 16.
Outstanding Assets, 17. Short Term Liabilities, 18. Prepaid Expenses, 19. Accrued Income,
20. Interest on Capital, 21. Income, 22. Credit Sales, 23. Provision for doubtful debts, 24.
Mutual indebtness, 25. Goods in Transit.
Answer the following questions within one sentence each:
(i) What is accrued income? [CHSE – 2015]

(ii) What do you mean by adjustments?
(iii) What is closing stock?
(iv) How the value of closing stock is shown in Trading and Profit & loss Account and in
balance Sheet?
(v) In which case opening stock will not appear in Trial Balance, instead closing stock
appears in Trial Balance?
(vi) As per which Accounting Standard, inventories should be valued at the lower of cost or
net realizable value?
(vii) What do you mean by outstanding expenses?
(viii) What do you mean by prepaid expenses?
(ix) Income received in advance is also known as.
(x) How closing stock is valued as per Accounting Standard – 2?
GROUP - B
(Very Short Answer Type)
Answer the following questions within 30 words
1. How will prepaid insurance be shown in the Final Accounts when it is given in the
adjustments? [CHSE – 2016]
2. Name the methods of marshalling of assets and liabilities in the Balance Sheet.
[CHSE – 2016]
3. Show the journal entry for creation of Reserve for discount on creditors. [CHSE – 2016]
4. What does manufacturing Account reveal and to which account is its balance transferred?
[CHSE – 2016]
5. Write any two manufacturing expenses. [CHSE – 2016]

6. In a manufacturing concern, what do stocks constitute? [CHSE – 2015]
7. For commission received, what entry is passed? [CHSE – 2015]
8. What entry is passed for making provision for discount on debtors? [CHSE – 2015]
9. Give any two examples of current liabilities. [CHSE – 2015, 2011]
10. What adjusting entry is passed for prepaid expense? [CHSE – 2015]
11. What is meant by factory expenses? [CHSE – 2015]
12. What do you mean by preliminary expenses? [CHSE – 2014, 2013]
13. What is Fixed Assets? [CHSE – 2013, 2011]
14. What is Goodwill? [CHSE – 2009]
15. Define the concept of drawings. [CHSE – 2011, 2008]
16. What do you mean by adjusted purchases?
17. What are the non-cash or notional items, while preparing final accounts?
18. Explain “Hidden” or implied adjustments.
19. What do you understand by “Goods sent on approval basis” or Goods on sale or return”
basis?
20. What do you understand by bad debts and doubtful debts?
21. Why interest is allowed on capital and charged on drawings?
22. Why are provisions made for doubtful debts?
23. Give two examples of accrued expenses.
24. Give two advantages of matching.
25. What is deferred revenue? Give two examples.
26. Give the meaning of accrued revenue. Also give two examples.
27. What are the advantages of matching?
28. How are accruals treated in account?
29. How manager’s commission on net profit is calculated while preparing [mal accounts?
30. How will you treat ‘outstanding expenses and prepaid expenses appearing inside trial
balance?
(Short Answer Type)
Answer the following questions within 50 words
(a) Distinguish between Manufacturing Account and Trading Account. [CHSE – 2015]
(b) What are closing entries? How are those passed? [CHSE – 2015]
(c) Explain the concept of adjustment.
(d) Show the treatment of closing stock in both the cases when given inside the Trial Balance
and outside as adjustment.
(e) What do you mean by Goods sent on approval basis or Goods on Sale or Return basis?
(f) Define interest on capital and show its adjustment in final accounts.
(g) What are the journal entries are to be passed for prepaid expenses and outstanding expenses
at the time of preparing final accounts?
(h) Make a distinction between Gross Profit and Net profit.
(i) What are the basic difference between interest on capital and interest on drawings?
(j) What are the treatments of Provision for doubtful debts in the process of preparing final
accounts of a sole trading concern?
(k) Define Managerial Commission. Discuss its types and process of calculation of such
commission payable.
GROUP – C
(Long Answer Type)
Answer the following questions
1. Define the concept of adjustment. Discuss various adjustment entries passed in the
process of maintaining accounting records in the form of final accounts.
2. What is Balance Sheet? Explain the need of preparing Balance Sheet. Give a specimen of
a Balance Sheet.
3. Pass journal entries of any five adjustments and show their respective treatment in the
final accounts at the end of the year.
4. What do you mean by adjustments? Enumerate various adjustments which are usually
made in the rooks on the closing date of account year.
5. How are the additional bad debts outside the trial balance treated while preparing final
accounts?
6. Show how provision for bad and doubtful debts is created? Why is it credited? How is it
affected by the occurrence of actual bad debts? How does it appear in the balance sheet?
PRACTICAL PROBLEMS
1. The following trial balance of JPR Pvt. Ltd. for the year ended 31st December, 2016 is
given:
Dr. Cr.
Particulars Rs. Particulars Rs.
Stock 1. 1.2016 27,500 Capital 2,00,000
Machinery 80,000 Loan 25,000
Sundry debtors 25,000 General Reserve 10,000
Land & Buildings 85,000 Rent received 4,500
Rates and Taxes 8,000 Interest on drawings 500
Bad Debts 500 Sales 1,10,000
Wages 15,000 Creditors 23,000
Insurance 2,000 Sundry receipts 8,000
Drawings 10,000 Interest on investments 2,500
General expenses 2,000 Bank overdraft 17,500
Purchases 45,000 Provision for bad debts 4,000
Director’s fees 1,800
Cash in hand 3,200
Investments 25,000
Building 55,000
Bills Receivable 20,000
4,05,000 4,05,000
Adjustments:
1. Stock as on 31st December 2016 amounted to Rs. 30,000.
2. Depreciate machinery by 5%, and land & building by 10%
3. Provide bad and doubtful debts Rs.2,500.
4. Wages outstanding were Rs.1,500.
Prepare Trading and Profit and Loss Account and Balance Sheet for the year ending 31st December
2016.
[Ans. Gross profit Rs. ; Net profit Rs. ; Balance Sheet Rs. .]
2. Shankar Traders has provided the following trial balance as on 31st March, 2017.
Particulars Credit Debit

Rs. Rs.
Capital - 80,000
10% Loan 10,000 -
Debtors & Creditors 25,000 26.000
Purchases & Sales 45,000 68,000
Returns 2,000 1,000
Wages 3,000 -
Cash in hand 2,000 -
Cash at Bank 10,000
Interest on Loan - 1,000
Furniture 40,000 -
Carriage Inward 3,500 -
Drawings 10,000 -
Plant & Machinery 60,000 -
Commission - 5,000
Discount 3,700 2,000
Bank Overdraft - 16,000
Royalty on Production 2,900 -
Printing & Stationary 2,900 -
Bills Payable - 21,000
2,20,000 2,20.000
Adjustments:
1. Closing stock was valued at Rs. 20,000.

2. Wages due but not yet paid amounted Rs.1,200.
3. Commission earned but not received is Rs.2,000.
4. Depreciation on Furniture @ 10% p.a.
[Ans. Gross profit Rs. ; Net profit Rs. ; Balance Sheet Rs. ]
3. The trial balance of Jaiguru Pvt. Ltd as on 31st March, 2017 is as follows:
Cash in hand 12,000
Cash at Bank 13,000
Purchases 1,40,000
Wages 10,000
Fuel & Power 3,700
Building 1,30,000
Machinery 80,000
Salaries 2,600
Audit Fees 2,700
Insurance 4,000
Drawing 4,000
Sales 2,32,000
Bad debts 1,500
Commission 5,000
Capital 3,26,900
5,87,100 5,87,100
Adjustments:

3. Audit Fees due Rs 600.
5. Prepaid Insurance amounted to Rs 500.
Sheet of Jaiguru Pvt. Ltd. as at 31st March, 2017.
[Ans. Gross profit Rs. ; Net profit Rs. ; Balance sheet total Rs. .]
4. The trial balance of Satnam Consultancy Firm as on 31 st March, 2017 is as follows:
Furniture 60,000
Cash in hand 10,000
Cash at Bank 22,000
Purchases 1,20,000
Wages 12,000
Fuel & Power 3,000
Printing & Stationery 2,200
Salaries 3,000
Audit Fees 2,000
Insurance 2,400
Drawing 5,000
Sales 2,32,000
Bad debts 1,500
Carriage inward 2,000

Commission 2,000
Interest 1,100
Capital 2,62,800
5,31,400 5,31,400
Adjustments:
Prepare trading, profit and loss account for the year ended 31st March, 2017 and also the balance
sheet as on that date after taking into consideration the following adjustments:
1. Stock on 31st March, 2017 amounted to Rs.20,000.
2. Provide depreciation on land and building @ 5%; on furniture @ 10%; and on plant and
machinery@ 5%.
3. Outstanding salaries amounted to Rs.1,000.
4. Insurance paid up to 30th September, 2017.
5. Write-off bad debts of Rs. 300.
6. Reserve for doubtful debts @ 5% of debtors.
7. Goods withdrawn by Manish for personal use Rs.2,000.
5. From the following trial balance of Umasankar Pvt. Ltd., prepare Trading and Profit
and Loss Account with Balance Sheet for the year ending on 31 st March, 2017.
Capital 50,000

Drawings 3,000
Purchases 50,250
Wages 20,500
Bank 12,000
Repair 2,000
Stock 25,000
Return Outward 2,500
Rent 3,200
Sales 80,200
Manufacturing Expenses 2,400
Trade Expenses 2,300
Bad Debts 2,000
Carriage 1,750
Bills Payable 12,500
Return Inward 1,200
1,55,800 1,55,800

2. Provide for Depreciation on Plant & Machinery Rs 500
3. Allow 5% Interest on Capital
4. Rs 500 is due for repair.
6. The following trial balance of Mr. Satya Sundar for the year ended March 31st, 2017:
Dr. Cr.
Particulars Rs. Particulars Rs.
Purchases 1,25,000 Sales 2,25,000
Opening stock 20,000 Capital 2,56,100
Salaries 20,500 Discount 2,000
Trade expenses 6,700 Commission 5,000
Plant and Machinery 1,10,000 Interest on investments 1,500
Land and Building 1,00,000 Returns outward 5,000
Wages 10,000 Discount received 2,500
Carriage inward 4,000 Sundry Creditors 15,000
General expenses 6,250 Bank overdraft 35,000
Establishment Expenses 4,350
Coal and Coke 1,500
Advertisement 1,800
Cash and Bank 20,000
5% Investments 50,000
Manufacturing expenses 5,000
Repairs 7,000
Returns inwards 5,000
Drawings 10,000
5,47,100 5,92,000
Additional Information:
1. Closing Stock at the end of the year amounted to Rs. 40,000.

2. Wages have been paid for 10 months only.
3. Salaries included Rs.10,000 paid for erection of machinery at the beginning of the
year.
4. Provide provision for bad debts @5% on debtors.
5. Depreciate plant and machinery by 5% and land and building by 10%.
Prepare Trading and Profit and Loss Account for the year and a Balance Sheet as on 31st March,
2017.
[Ans. Gross Profit Rs ; Net Profit Rs. ; Balance Sheet Rs. ]
7. The following is the Trial Balance of M/s. Mohanty Snacks Agency, Phulbani as on 31st
March, 2017. Prepare Trading and Profit & Loss Account for the year ended 31st March,
2017 and a Balance Sheet as on that date:

Rs. Rs.
Capital - 1,12,000
Buildings 1,20,000 -
Drawings 10,000 -
Furniture and Fittings 5,000 -
Motor Van 40,000 -
Loan from Mr. A@ 12% interest - 20,000
Interest paid on above 1,000 -
Sales - 2,20,000
Purchases 1,05,000 -
Opening Stock 20,000 -
Establishment Expenses 10,000 -
Wages 2,000 -
Insurance 1,000 -
Commission - 2,000
Bank Balance 20,000
3,64,000 3,64,000
Adjustment:
(a) The value of closing stock on 31st March, 2009 was Rs.20,000.
(b) Outstanding wages Rs.300.
(c) Commission received in advance Rs.800.
(d) Allow interest on capital@ 10% p.a.
(e) Charge interest on drawings Rs. 500.
(f) Balance of interest due on the loans is also to be provided for.
Ans. Gross Profit Rs. ; Net Profit Rs. ; Balance Sheet Rs. .
8. Following is the trial balance of Mr. A.K. Agency on 31st March, 2017.
Rs. Particulars Rs.

Drawings 5,000 Capital 1,45,000
Sundry debtors 41,000 Sundry Creditors 10,000
Bad debts 1,000 Bad Debts reserve 1,100
Bill receivable 10,000 Bills Payable 11,000
Furniture 15,000 Bank Loan 8,000
Plant and Machinery 40,000 Sales 1,75,000
Land and Building 80,000
Cash in hand 1,500
Purchase 1,20,000
Carriage outward 1,200
Salaries 13,800
Rates and Taxes 1,300
Telephone Charges 1,200
Stationery and Printing 1,800
Insurance 1,400
Bank Interest 300
Travelling expenses 1,600
Commission 2,000
3,50,100 3,50,100
You are required to prepare final accounts by giving due consideration to the following adjustments:
(a) Salaries payable Rs.1.200.
(b) Bad debts Rs. 1,000 to be written off.
(c) Provide 2'% provision for discount on debtors and creditors after providing 5% for bad and
doubtful debts.
(d) Remuneration to manager at 2% on gross profit to be provided for.
(e) Write off depreciation at 10% on Plant and Machinery and 5%) on Land and Building
[Ans. Gross Profit Rs. ; Net profit Rs. ; Balance Sheet Rs. .]
9. From the following trial balance extracted from the books of Pooja Traders, Prepare a
trading account, profit and loss account for the year ending 31st March, 2017 and a
Balance Sheet as on that date.

Rs. Rs.
Capital 1,20,000
Drawings 1,000
Plant and Machinery 1,20,000
Furniture 12,000
Debtors 3,500
Creditors 20,600
Purchases and Sales 1,63,200 2,20,000
Wages 10,000
Cash at bank 12,600
Salaries 2,800
Repairs 1,950
Insurance 2,420
Bills payable 2,000
Bad debts 1,500
Carriage 1,000
3,62,600 3,62,600
The following adjustments are to be made:
1. Closing stock Rs.15,000.
2. Depreciate plant and machinery 10%; Furniture 15%
3. Allow interest on capital at 10% p.a.
4. Outstanding Salary amounted to Rs.500.
5. Prepaid Insurance Rs 520.
[Ans. Gross profit Rs. ; Net loss Rs. ; Balance sheet total Rs. ]
10. From the following trial balance of Senapati Co., prepare Trading and Profit and Loss
Account with Balance Sheet for the year ending on 31 st December, 2016.
Cash in hand 5,000
Purchases 1,20,000
Wages 12,000
Fuel & Power 2,300
Building 50,000
Machinery 42,000
Patents 13,000
Salaries 4,000
Insurance 1,500
Drawing 5,000
Sales 1,97,500
Capital 1,42,000
3,56,700 3,56,700
Adjustments:

6. Insurance includes a premium of Rs 340 on a policy paid up to 30th September 2017
11. The balance in the provision for bad debts and provision for discount on debtors stood at Rs.1,200
and Rs.700 respectively on 1st April, 2016. On 31st March, 2017 the debtors stood at Rs.15,000. A
bill discounted with the bank for Rs.800 was dishonoured and an entry for this is still to be made.
During 2016-17, bad debts written off were Rs.800 and discounts allowed were Rs.600. The firm
maintains provision for bad debts at 5% and provision for discount at 2%, of the debtors. Show both
these accounts and also give the necessary journal entries.
Answers:
12. 0n 1st April, 2015, the reserve for bad debts showed a credit balance of Rs.3,500. During the year the
bad debts amounted to Rs.2,000. The debtors on 31st March, 2016 amounted to Rs.90,000 and a
reserve of 5% for doubtful debts was maintained. The bad debts during the year 2016-17 amount to
Rs.5,000. On 31st March, 2017 the debtors amounted to Rs.1,00,000 and a 5% reserve for bad debts
was required to be kept. in 2017-18, the bad debts amounted to Rs.1,000 and the debtors at the end of
the year amounted to Rs.40,000 on which a reserve of 5% for bad debts was to be maintained.
Show the Reserve for bad debts account and also show how these items will appear in the profit and
loss account and balance sheet in each of three years.
Answers:
13. 0n 1st January 2015 M/s. Gopi Krishna had a bad debts reserve of Rs.600. On 31st December 2015
the total debtors amounted to Rs.20,000 out of which Rs.1000 were bad and had to be written off. The
firm wants to maintain a bad debts reserve at 5% on the debtors. On 31st December 2016 total debtors
amounted to Rs.10,000 out of which Rs.300 had to be written off as bad debts. The reserve for bad
debts is to be maintained at 5%, of debtors.
Show the bad debts account and provision for bad debts account for 2015 and 2016.
[Ans. ]
14. The Following are the balances of Ashok Garments Stores as on 31st March, 2017.
Rs. Rs.
Cash in hand 600 Sales 1,42,330
Cash at bank 2,000 Returns outwards 500
Purchases account 1,00,500 Capital account 74,000
Returns inwards 830 Sundry creditors 26,700
Wages account 8,000 Commission 9,000
Fuel and power 4,500
Carriage on sales 3,000
Carriage on purchases 2,000
Stock (1.4.2008) 5,000
Buildings account 35,000
Freehold land 15,000
Machinery 30,000
Patents 10,000
Salaries 2,000
General expenses 3,000
Insurance 600
Drawings 5,000
Sundry debtors 25,500
2,52,530 2,52,530
Prepare trading and profit and loss account at loss balance sheet as on 31st March, 2017
after taking into account the following adjustments.
(i) Closing Stock amounted to Rs 23,000.

(ii) Depreciation on Plant & Machinery is 5% and on Patents 10%.
(iii) Prepaid Insurance amounted to Rs 200.
(iv) Salaries due but not paid amounted to Rs 800.
(v) Bad debts are of Rs 500.
15. From the following trial balance of Amir Khan Pvt. Co., prepare trading and profit and
loss account for the year ended 31st March, 2017 and a balance sheet as on that date.
Debit Credit
Rs. Rs
Plant and machinery 50,000
Direct wages 4,000
Salaries 5,200
Furniture & Fixtures 12,000
Land & Building 85,000
Insurance and taxes 3,100
Patents 10,000
General expenses 5,140
Factory fuel and power 1,860
Lighting factory 500
Establishment Expenses 2,000
Stock 1st April, 2016 14,800
Purchases 1,07,100
Sales returns 3,150
Discount 1,400
Bad debts 2,000
Interest and bank charges 600
Cash at bank 7,500
Cash in hand 150
Abdul Rahman’s capital a/c. 80,000
Sundry creditors 54,160
Bank loan 10,000
Purchases returns 1,140
Reserve for bad & doubtful debts 2,000
Sales 2,13,700
3,61,000 3,61,000
Adjustments:
1. Stock on 31st March, 2002 Rs.20,000.
2. Deprecation - plant and machinery @ 10% fixtures and fitting @ 5%.
3. Create reserve for bad and doubtful debts to 5%.
4. Prepaid insurance Rs.500.
5. A commission of 1 % on the gross profit to be provided for works manager.
6. A commission of 5% on net profit after charging the works manager's commission
to be credited to general manager.
16. Prepare the trading and profit and loss Account and balance sheet of Gangadhar Pvt. Ltd. from
the following particulars as on 31st March, 2017.
Rs.
Capital 3,00,000
Drawings 15,000
Purchases 95,000
Investment 35,000
Interest on investment 1,250
Productive Wages 30,000
Cash in hand 1,000
Cash at bank 10,000
Legal expenses 2,000
Plant and machinery 2,00,000
Bills receivable 5,000
Bills payable 14,000
Salaries 10,000
Office expenses 4,000
Discount account (Cr.) 1,500
Land and buildings 42,000
Sales 2,40.000
Stock (1-4-08) 50,000
Motor car 20,000
Bad debts 1,000
Insurance 1,000
Gas and fuel 2,500
Freight and carriage 4,000
Loose tools 4,000
Factory lighting 3,000
Sundry creditors 40,000
Return inwards 5,000
Return outwards 3,000
Creditors 20,000
Furniture and fittings 6,000
Advertisement 1,200
Income tax 1,500
Travelling expenses 850
Adjustments:
1. Stock on 31st March, 2017 was Rs. 25,000.

2. Prepaid salaries and wages Rs.1,000 and Rs.400 respectively.
3. Insurance premium was outstanding to the extent Rs.300.
4. Depreciate plant and machinery by 10% furniture (office) by 5% loose tools by 15%
and motor car by 10%.
5. Write off Rs.700 as bad debts and further provide 5% reserve for doubtful debts.
[Ans. Gross profit Rs. ; Net profit Rs. ; Balance sheet total Rs.
17. The following particulars are extracted from the books of M/s Lipsarani Sahu Agency
for the year ended 31st December 2016.
Particulars Debit Credit

Rs. Rs
Advertisement 1,250 -
Bad debts 1,000 -
Bad debts provision - 2,000
Bank charges 200 -
Capital - 75,400
Factory power 7,000 -
Furniture 1,800 -
General expenses-factory 400 -
General expenses-office 650 -
Insurance 1,800 -
Lighting and heating 900 -
Plant and machinery 54,000 -
Purchases 67,300 -
Packing and transport 2,500 -
Rent and rates 2,950 -
Repairs to plant 1,550 -
Salaries-office 7,300 -
Sales - 1,58,300
Stock 1.4.08-Raw materials 10,400 -
Stock 1.4.08-Finishedgoods 14,700 -
Stock 1.4.08-Work-in-progress 3,350 -
Wages-factory 11,450 -
Debtors 51,100 -
Creditors - 12,300
Discount received - 800
Cash at bank 6,850 -
Cash in hand 350 -
2,48,800 2,48,800
Adjustments:
1. Closing Stock as on 31.12.2016: Raw materials Rs.10,000; Work-in-progress Rs.3,000;

Finished goods Rs.19,000.
2. Provide depreciation at 10% p.a. on plant and machinery and 5%, p.a. on furniture.
3. Further bad debts Rs 1,100.
4. Create provision for doubtful debts @ 5% on sundry debtors.
[Ans. Cost of goods manufactured Rs. ; Gross profit Rs. ; Net profit Rs. ;
Balance sheet Rs. ].
18. The trial balance of Sabina Stores, Phulbani as on 31 st March, 2017 is as follows:
Cash in hand 2,000
Cash at Bank 10,000
Purchases 1,80,000
Wages 15,000
Fuel & Power 2,000
Building 1,30,000
Machinery 1,00,000
Salaries 3,000
Audit Fees 2,000
Insurance 4,000
Drawing 5,000
Sales 2,50,000
Bad debts 1,000
Commission 5,000
Capital 4,06,500
6,84,000 5,79,000
Adjustments:

3. Outstanding Salary amounted to Rs 400.
5. Commission received in advance Rs 500.
6. Manager’s Commission charged @ 10% p.a. after charging his commission.
Sheet of Sabina Stores as at 31st March, 2017.

Chapter - 03 Final Accounts With Adjustments

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Chapter - 03 Final Accounts With Adjustments

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CHAPTER – 3

Final Accounts (with adjustment)

 Describe the meaning and purpose of Adjustments

The main objectives of recording adjustments are:

To Expenses Outstanding A/c

Salaries A/c Dr 2,000

To Outstanding Salary A/c 2,000

(Being salary due for two months not yet paid)

Trading and Profit & Loss Account

For the year ending 31st March 2017

As on 31st March, 2017

Liabilities Amount Assets Amount

Outstanding Salary 4,000

Prepaid Expenses A/c Dr

(Being the expenses in advance)

Treatment in Final Accounts:

Prepaid Insurance A/c Dr 2,500

To Insurance A/c 2,500

(Being the amount of insurance premium paid in advance)

Trading and Profit & Loss Account

For the year ending 31st March 2017

(Rs 10,000 x 3/12)

As on 31st March, 2017

Liabilities Amount Assets Amount

Prepaid Insurance 2,500

Accrued Income A/c Dr

Treatment in Final Accounts:

Accrued Interest A/c Dr 700

To Interest A/c 700

Trading and Profit & Loss Account

For the year ending 31st March 2017

Accrued Interest 700

4. Income received in Advance

Income Received A/c Dr

To Income Received in Advance A/c

(Being the amount received in advance adjusted)

Treatment in Final Accounts

1. Subtracted from the income received in Profit & Loss Account

Profit & Loss Account

For the year ending 31st March 2017

Commission received in advance 2,300

To Fixed Assets A/c

(Being depreciation charged on fixed assets)

Treatment in Final Accounts

1. Posted in the Profit & Loss Account Debit Side as an expenditure

Trial Balance of JPR Traders

as on 31st March, 2017

Particulars Amount Amount

Land & Building 4,00,000

Depreciation A/c Dr 75,000

To Machinery A/c 25,000

Profit & Loss Account

(-) Depreciation 25,000 2,25,000

(-) Depreciation 10,000 90,000

Land & Building 4,00,000

(-) Depreciation 40,000 3,60,000

Closing Stock A/c Dr

(Being closing stock is valued at the end of the accounting year)

Treatment in Final Accounts

1. Closing is shown in the credit side of the Trading Account

Trading and Profit & Loss Account

Example – 7 (If closing stock appears inside the Trial Balance)

as on 31st March, 2017