Correction in Final Accounts

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Lesson-10 Lesson-10 Final Accounts Final Accounts Learning Objective Learning Objective

• To know how to make various a

• To know how to make various adjustments in trial balancedjustments in trial balance

Adjustments Adjustments

All the transactions which pertain to the period of final accounts but are n All the transactions which pertain to the period of final accounts but are notot

considered while preparing the trial balance are called adjustments. These transactions considered while preparing the trial balance are called adjustments. These transactions have been recorded and appear

have been recorded and appear in trial balance but do not pertain to the period in trial balance but do not pertain to the period of finalof final accounts.

accounts.

Adjustments given outside the trial balance represent entries yet to be made in the Adjustments given outside the trial balance represent entries yet to be made in the journal and the ledger, with the result that the effec

journal and the ledger, with the result that the effects of each of the adjustments have tots of each of the adjustments have to be recorded. Therefore, the effect of nominal account appears in the trading

be recorded. Therefore, the effect of nominal account appears in the trading or profit andor profit and loss account. At the same time, the effect concerning an asset or liability appears in

loss account. At the same time, the effect concerning an asset or liability appears in thethe balance sheet.

balance sheet.

In short, all the adjustments given outside the trial balance will appear in both

In short, all the adjustments given outside the trial balance will appear in both the tradingthe trading or profit and loss account and the

or profit and loss account and the balance sheet. The exception will be in the cases wherebalance sheet. The exception will be in the cases where an adjustment is such that it affects two nominal accounts only and

an adjustment is such that it affects two nominal accounts only and when both the effectswhen both the effects of the adjustment will have to be dealt with in the trading a

of the adjustment will have to be dealt with in the trading and profit and loss account.nd profit and loss account.

Common Adjustments

The following chart shows the effects of adjustments in final accounts: The following chart shows the effects of adjustments in final accounts:

S.

S. _Adjustment_Adjustment Journal entryJournal entry _{Treatment of adjustment in}_{Treatment of adjustment in} No.

No. _ffo_orr _tth_he_e _ffiin_naal_l _aacccco_ou_un_nttss 1

1.. DDeepprreecciiaattiioonn DDeepprreecciiaattiioon n AAccccoouunntt DDrr.. (i) To be debited to profit(i) To be debited to profit T

To o AAsssseet t AAccccoouunntt aannd d lloosss s aaccccoouunntt..

(ii) To be deducted from the (ii) To be deducted from the

value of an asset in the value of an asset in the balance sheet.

balance sheet. 2

2.. CClloossiinngg SSttoocck k AAccccoouunntt DDrr.. ((ii) ) TTo o bbe e ccrreeddiitteed d tto o ttrraaddiinn ssttoocckk TTo o TTrraaddiinng g AAccccoouunntt aaccccoouunntt..

(ii) To be shown on the (ii) To be shown on the

assets side of the balance assets side of the balance sheet.

sheet. 3.

3. Bad debts toBad debts to Bad Debts AccountBad Debts Account Dr.Dr. (i) (i) Amount Amount of of bad bad debtsdebts be written

be written To Sundry Debtors A/cTo Sundry Debtors A/c to be debited to profitto be debited to profit o

offff aannddlloossss aaccccoouunntt.. (ii)

(ii) To To be be deducted deducted fromfrom sundry debtors in the sundry debtors in the

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balance sheet.

4. Reserve for Profit and Loss Account Dr. (i) To be debited to profit doubtful To R.D.D. and loss account.

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debts (ii) To be shown by way of deduction from sundry debtors in the balance sheet.

5. _{Outstanding Expenses (Name) Account Dr. (i) Amount to be added to}

Expenses To Outstanding Creditors for particular item in the Expenses A/c trading or profit and

loss accounts.

(ii) To be shown on the liabilities side of the balance sheet.

6. _{Outstanding Outstanding Income Account Dr.}(i) Amount to be

income To Income (Name) Account added from the

particular item in the trading or profit and loss accounts.

(ii) To be shown on asset side of the balance sheet.

7. Pre-Paid Pre-Paid Expenses A/c Dr. (i) Amount to be expenses _{To Expenses (Name) Accounts} deducted from

particular item in the profit and loss

accounts.

(ii) To be shown on the assets side of the balance sheet.

8. Income Income (Name) Account Dr. (i) To be debited to profit received in To Income Received in and loss account. advance or Advance Account or (ii) To be added to capital accrued To Accrued Income in the balance sheet. 9 Interest on Interest Account Dr. (i) To be debited to profit

capital To Capital Account and loss account. (ii) To be added to capital

in the balance sheet. 10. Interest on Capital Account Dr. (i) To be credited to profit

drawings To Interest on Drawings and loss account. Account (ii) To be deducted from

capital in the balance sheet.

11. Net profit Profit & Loss Account Dr. To be added from capital To Capital Account in the balance sheet. 12. Net loss Capital Accou Dr. To be add from capital

To Profit & Loss Account in the balance sheet.

13. Goods used Drawings Account Dr. (i) To be deducted from by To Purchases Account purchases.

(ii) To be added to proprietor

drawings. for personal

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(5)

14 Reserve for Reserve for Discount on (i)To be credited to profit discount on Creditors Account Dr. and loss account.

creditors To Profit & Loss Account (ii) To be deducted from sundry creditors in the balance sheet.

15 Distribution Advertisement Account Dr. (i) To be debited to profit and

of goods as To Purchases Account loss account as toward

free samples advertisement.

(ii) To be deducted from purchases in trading account.

16 Goods lost by Goods Lost by Fire Account Dr. (i) Trading account, credit fire To Trading Account side (full cost value).

(Total Cost Value) (ii) Profit and loss account,

Insurance Claim Account Dr. debit side, the loss amount/or

Profit & Loss Account Dr. _{the amount} _{not recovered} To Goods Lost by Fire A/c _{through insurance claim.}

(iii)Balance sheet, asset side,

amount of insurance claim if Received.

Summary

1.All the transactions which pertain to the period of final accounts but are not considered while preparing the trial balance are called adjustments.

2.Adjustments given outside the trial balance represent entries yet to be made in the journal and the ledger.

3.All the adjustments given outside the trial balance will appear in both the trading or profit and loss account and the balance sheet.