In chapter 8, you learnt about the preparation of simple final accounts in the format of trading and profit and loss account and balance sheet. The preparation of simple final accounts pre-supposes the absence of any accounting complexities which are normal to business operations. These complexities arise due to the fact that the process of determining income and financial position is based on the accrual basis of accounting. This emphasises that while ascertaining the profitability, the revenues be considered on earned basis and not on receipt basis, and the expenses be considered on incurred basis and not on paid basis. Hence, many items need some adjustment while preparing the financial statements. In this chapter we shall discuss all items which require adjustments and the way these are brought into the books of account and incorporated in the final accounts.

9.1 Need for Adjustments

According to accrual concept of accounting, the profit or loss for an accounting year is not based on the revenues realised in cash and the expenses paid in cash during that year. There may exist some receipts and expenses in the current year which partially relate to the previous year or to the next year. Also, there may exist incomes and expenses relating to the current year that still need to be brought into books of account. Such items duly adjusted, the final accounts will not reflect the true and fair view of the state of affairs of the business.

For example, an amount of ₹ 1,200 paid on July 01, 2016 towards insurance premium. Any general insurance premium paid usually covers a period of 12 months. Suppose the accounting year ends on March 31,2017, it would mean that one fourth of the insurance premium is paid on July 01, 2016 relate to the next accounting year 2017-18. Therefore, while preparing the financial statements for 2016-17, the expense on insurance premium that should be debited to the profit and loss account is ₹ 900 (1,200 - ₹ 300).

Let us take another example. The salaries for the month of March, 2017 were paid on April 07, 2017. This means that the salaries account of 2016-17 does not include the salaries for the month of March 2017. Such unpaid salaries is termed as salaries outstanding which have to be brought into books of account and is debited to profit and loss account along with the salaries already paid for the month of April, 2016 up to Feburary, 2017.

Similarly, adjustments may also become necessary in respect of certain incomes received in advance or those which have accrued but are still to be received. Apart from these, there are certain items which are not recorded on day-to-day basis such as depreciation on fixed assets, interest on capital, etc. These are adjusted at the time of preparing financial statements. The purpose of making various adjustments is to ensure that the final accounts reveal the true profit or loss and the true financial position of the business. The items which usually need adjustments are:

1. Closing stock

2. Outstanding/expenses

3. Prepaid/Unexpired expenses

4. Accrued income

5. Income received in advance

6. Depreciation

7. Bad debts

8. Provision for doubtful debts

9. Provision for discount on debtors

10. Manager’s commission

11. Interest on capital

It may be noted that when we prepare the financial statements, we are provided with the trial balance and some other additional information in respect of the adjustments to be made. All adjustments are reflected in the final accounts at two places to complete the double entry. Our earlier example in chapter 8 (Page no. 294) which represents the trial balance of Ankit is reproduced in figure 9.1:

Figure 9.1 : Showing the trial balance of Ankit

We will now study about the items of adjustments and you will observe how these adjustments are helpful in the preparation of financial statements in order to reflect the true profit and loss and financial position of the firm.

9.2 Closing Stock

As per the example in chapter 9 (Page no. 336), the closing stock represents the cost of unsold goods lying in the stores at the end of the accounting period. The adjustment with regard to the closing stock is done by (i) by crediting it to the trading and profit and loss account, and (ii) by showing it on the asset side of the balance sheet. The adjustment entry to be recorded in this regard is :

The closing stock of the year becomes the opening stock of the next year and is reflected in the trial balance of the next year. The trading and profit and loss account of Ankit for the year ended March 31, 2017 and his balance sheet as on that date shall appear as follows :

Sometimes the opening and closing stock are adjusted through purchases account. In that case, the entry recorded is as follows :

This entry reduces the amount in the purchases account and is also known as adjusted purchases which is shown on the debit side of the trading and profit and loss account. In this context, it may be noted, that the closing stock will not be shown on the credit side of the trading and profit and loss as it has been already been adjusted through the purchases account. Not only, in such a situation, even the opening stock will not be separately reflected in the trading and profit and loss account, as it is also adjusted in purchases by recording the following entry:

Another important point to be noted in this context is that when the opening and closing stocks are adjusted through purchases, the trial balance does not show any opening stock. Instead, the closing stock shall appear in the trial balance (not as additional information or as an adjustment item) and so also the adjusted purchases. In such a situation, the adjusted purchases shall be debited to the trading and profit and loss account.

The closing stock shall be shown on the assets side of the balance sheet as shown below:

9.3 Outstanding Expenses

It is quite common for a business enterprise to have some unpaid expenses in the normal course of business operations at the end of an accounting year. Such items usually are wages, salaries, interest on loan, etc.

When expenses of an accounting period remain unpaid at the end of an accounting period, they are termed as outstanding expenses. As they relate to the earning of revenue during the current accounting year, it is logical that they should be duly charged against revenue for computation of the correct amount of profit or loss. The entry to bring such expenses into account is :

The above entry opens a new account called Outstanding Expenses which is shown on the liabilities side of the balance sheet. The amount of outstanding expenses is added to the total of expenses under a particular head for the purpose of preparing trading and profit and loss account.

For example, refer to Ankit’s trial balance (refer figure 10.1). You will notice that wages are shown at ₹ 8,000 . Let us assume that Ankit owes ₹500 as wages relating to the year 2016-17 to one of his employees. In that case, the correct expense on wages amounts to ₹ 8,500 instead of ₹ 8,000. Ankit must show ₹ 8,500 as expense on account of wages in the trading and profit and loss account and recognise a current liability of ₹ 500 towards the sum owed to his staff. It will be referred to as wages outstanding and it will be adjusted to wages account by recording the following journal entry:

The amount of outstanding wages will be added to wages account for the preparation of the trading and profit and loss account as follows :

Observe carefully the trading and profit and loss account of Ankit. Did you notice the amount of net profit is reduced to ₹ 19,000 on account of outstanding wages. The item relating to outstanding wages will be shown in balance sheet as follows :

9.4 Prepaid Expenses

There are several items of expense which are paid in advance in the normal course of business operations. At the end of the accounting year, it is found that the benefits of such expenses have not yet been fully received; a portion of its benefit would be received in the next accounting year. This portion of expense, is carried forward to the next year and is termed as prepaid expenses. The necessary adjustment in respect of prepaid expenses is made by recording the following entry:

The effect of the above adjustment entry is that the amount of prepaid part is deducted from the total of the particular expense, and the new account of prepaid expense is shown on the assets side of the balance sheet. For example, in Ankit’s trial balance, let us assume that the amount of salary paid by him to the employees includes an amount of ₹ 5,000 which was paid in advance to one of his employees upon his joining the office. This implies that Ankit has overpaid his staff by ₹ 5,000 on account of his salary. Hence, correct expense on account of salary during the current period will be ₹ 20,000 instead of ₹ 25,000. Ankit must show ₹ 20,000 expense on account of salary in the profit and loss account and recognise a current asset of ₹ 5,000 as an advance salary to the employee. It will be termed as prepaid salary account and will be recorded by the following journal entry :

The account of prepaid salary will be shown in the trading and profit and loss account as follows:

Observe how the prepaid salary has resulted in an increase of net profit by ₹ 5,000 making it as ₹ 24,000 Further, the item relating to prepaid salary will be shown in the balance sheet on the assets side as follows :

9.5 Accrued Income

It may also happen that certain items of income such as interest on loan, commission, rent, etc. are earned during the current accounting year but have not been actually received by the end of the same year. Such incomes are known as accrued income. The adjusting entry for accrued income is :

The amount of accrued income will be added to the related income in the profit and loss account and the new account of accrued income will appear on the asset side of the balance sheet.

Let us, for example, assume that Ankit was giving a little help to a fellow businessman by introducing few parties to him on commission for this service. In the trial balance of Ankit you will notice an item of commission received amounting to ₹ 5,000. Assume that the commission amounting to ₹ 1,500 was still receivable from the fellow businessman. This implies that income from commission earned during 2016-17 is ₹ 6,500 (₹ 5,000 + ₹ 1,500) Ankit needs to record an adjustment entry to give effect to the accrued commission as follows :

The account of accrued income will be recorded in trading and profit and loss account as follows :

Observe that the accrued income has resulted in an increase in the net profit by ₹ 1,500 making it as ₹ 25,500. Further, it will be shown in the balance sheet of Ankit on the assets side under the head current asset.

9.6 Income Received in Advance

Sometimes, a certain income is received but the whole amount of it does not belong to the current period. The portion of the income which belongs to the next accounting period is termed as income received in advance or an Unearned Income. Income received in advance is adjusted by recording the following entry:

The effect of this entry will be that the balance in the income account will be equal to the amount of income earned for the current accounting period, and the new account of income received in advance will be shown as a liability in the balance sheet.

For example, let us assume Ankit has agreed in March 31, 2017 to sublet a part of the building to a fellow shopkeeper @ ₹ 1,000 per month. The person gives him rent in advance for the next three months of April, May and June. The amount received had been credited to the profit and loss account. However, this income does not pertain to current year and hence will not be credited to profit and loss account. It is income received in advance and will be recognised as a liability amounting to ₹ 3,000. Ankit needs to record an adjustment entry to give effect to income received in advance by way of following journal entry:

This will lead a new account of rent received in advance of ₹ 3,000 which will appear as follows :

9.7 Depreciation

Recall from chapter 7 (Part-I), that depreciation is the decline in the value of assets on account of wear and tear and passage of time. It is treated as a business expense and is debited to profit and loss account. This, in effect, amounts to writing-off a portion of the cost of an asset which has been used in the business for the purpose of earning profits. The entry for providing depreciation is :

In the balance sheet, the asset will be shown at cost minus the amount of depreciation. For example, the trial balance in our example shows that Ankit has a furniture account with a balance of ₹ 15,000. Let us assume that furniture is subject to a depreciation of 10% per annum. This implies that Ankit must recognise that at the end of the year the value attached to furniture is to be reduced by ₹ 1,500 (₹ 15,000 × 10%). Ankit needs to record an adjustment entry to give effect to depreciation on furniture as follows :

Depreciation will be shown in the profit and loss account and balance sheet as follows :

Notice that the amount of net profit declines with the adjustment of depreciation. Let us now see how depreciation as an expense will be shown in balance sheet.

9.8 Bad Debts

Bad debts refer to the amount that the firm has not been able to realise from its debtors. It is regarded as a loss and is termed as bad debt. The entry for recording bad debt is:

You will notice in Ankit’s trial balance, that it contains bad debts amounting to ₹ 4,500. Whereas, the sundry debtors of Ankit are reported as ₹ 15,500. The existence of bad debts in the trial balance signifies that Ankit has incurred a loss arising out of bad debts during the year and which has been already recorded in the books of account.

However, assuming one of his debtors who owed him ₹ 2,500 had become insolvent, and nothing is receivable from him. But the amount of bad debts related to the current year is still to be account for. This fact appears as additional information and is termed as further bad debts. The adjustment entry to be recorded for the amount will be as follows. For this purpose, Ankit needs to record an adjustment entry as under :

This entry will reduce the value of debtors to ₹ 13,000 (₹ 15,500 - ₹ 2,500) and increases the amount of bad debts to ₹ 7,000 (₹ 4,500 + ₹ 2,500).

The treatment of further bad debts in profit and loss account and balance sheet is shown below :

9.9 Provision for Bad and Doubtful Debts

In the above balance sheet, debtors now appears at ₹ 13,000, which is their estimated realisable value during next year. It is quite possible that the whole of this amount may not be realised in future. However, it is not possible to accurately know the amount of such bad debts. Hence, we make a reasonable estimate of such loss and provide the same. Such provision is called provision for bad debts and is created by debiting profit and loss account. The following journal entry is recorded in this context :

Provision for doubtful debts is also shown as a deduction from the debtors on the asset side of the balance sheet.

Let us assume, Ankit feels that 5% of his debtors on March 31, 2017 are likely to default on their payments next year. This implies he expects bad debts of ₹ 650 (₹ 13,000 × 5%). Ankit needs to record the adjustment entry as :

This implies that ₹ 650 will reduce the current year’s profit on account of doubtful debts. In the balance sheet, it will be shown as a deduction from sundry debtors.

It may be noted that the provision created for doubtful debts at the end of a particular year will be carried forward to the next year and it will be used for meeting the loss due to bad debts incurred during the next year. The provision for doubtful debts brought forward from the previous year is called the opening provision or old provision. When such a provision already exists, the loss due to bad debts during the current year are adjusted against the same and while making provision for doubtful debts required at the end of the current year is called new provision. The balance of old provision as given in trial balance should also be taken into account.

Let us take an example to understand how bad debts and provision for doubtful debts are recorded. An extract from a trial balance on March 31, 2017 is given below :

Additional Information :

Write-off further bad debts ₹ 1,000 and create a provision for doubtful debts (a) 5% on debtors.

In this case, the following journal entries will be recorded :

Note : The amount of new provision for doubtful debts has been calculated as follows:

$₹ 31,000^{1} \times 5 / 100=₹ 1,550$.

9.10 Provision for Discount on Debtors

A business enterprise allows discount to its debtors to encourage prompt payments. Discount likely to be allowed to customers in an accounting year can be estimated and provided for by creating a provision for discount on debtors. Provision for discount is made on good debtors which are arrived at by deducting further bad debts and the provision for doubtful debts. The following journal entry is recorded to create provision for discount on debtors:

As stated above, the provision for discount on debtors will be created only on good debtors. It will be calculated on the amount of debtors arrived at after deducting the doubtful debts, i.e. ₹ 12,350 (₹ 13,000 - ₹ 650).

Ankit needs to record the adjustment entry as :

This will reduce the current year profit by ₹ 227 on account of probable discount on prompt payment. In the balance sheet, it will be shown as a deduction from the debtors account to portray correctly the expected realiable value of debtors as ₹ 12,123.

In the subsequent year, the discount will be transferred to the provision for discount on debtors account. The account will be treated in the same manner as the provision for doubtful debts.

9.11 Manager’s Commission

The manager of the business is sometimes given the commission on the net profit of the company. The percentage of the commission is applied on the profit either before charging such commission or after charging such commission. In the absence of any such information, it is assumed that commission is allowed as a percentage of the net profit before charging such commission.

Suppose the net profit of a business is ₹ 110 before charging commission. If the manager is entitled to 10% of the profit before charging such commission, the commission will be calculated as :

$$ =₹ 110 \times \frac{10}{100}=₹ 11 $$

In case the commission is 10% of the profit after charging such commission, it will be calculated as :

= Profit before commission × Rate of commission / (100 + commission)

$$ =₹ 110 \times \frac{10}{110}=₹ 10 $$

The managers commission will be adjusted in the books of account by recording the following entry :

Let us recall our example and assume that Ankit’s manager is entitled to a commission @ 10%. Observe the following profit and loss account if it is based on :

(i) amount of net profit before charging such commission

(ii) amount of profit after charging such commission.

9.12 Interest on Capital

Sometimes, the proprietor may like to know the profit made by the business after providing for interest on capital. In such a situation, interest is calculated at a given rate of interest on capital as at the beginning of the accounting year. If however, any additional capital is brought during the year, the interest may also be computed on such amount from the date on which it was brought into the business. Such interest is treated as expense for the business and the following journal entry is recorded in the books of account:

In the final accounts, it is shown as an expense on the debit side of the profit and loss account and added to capital in the balance sheet.

Let us assume, Ankit decides to provide 5% interest on his capital. This shall amount to ₹ 600 for which the following journal entry will be recorded:

This implies that net profit shall be reduced by ₹ 600. As a result, the reduced amount of profit shall be added to the capital in the balance sheet.

But, when interest on capital shall be added to the capital, this effect shall be neutralised. As shown below :

Test Your Understanding

Tick the correct answer :

1. Rahul’s trial balance provide you the following information :

Debtors	₹ 80,000
Bad debts	₹ 2,000
Provision for doubtful debts	₹ 4,000

It is desired to maintain a provision for bad debts of ₹ 1,000

State the amount to be debited/credited in profit and loss account :

(a) ₹ 5,000 (Debit)

(b) ₹ 3,000 (Debit)

(c) ₹ 1,000 (Credit)

(d) none of these.

2. If the rent of one month is still to be paid the adjustment entry will be :

(a) Debit outstanding rent account and Credit rent account

(b) Debit profit and loss account and Credit rent account

(c) Debit rent account and Credit profit and loss account

(d) Debit rent account and Credit outstanding rent account.

3. If the rent received in advance ₹ 2,000. The adjustment entry will be :

(a) Debit profit and loss account and Credit rent account

(b) Debit rent account Credit rent received in advance account

(c) Debit rent received in advance account and Credit rent account

(d) None of these.

4. If the opening capital is ₹ 50,000 as on April 01, 2016 and additional capital introduced ₹ 10,000 on January 01, 2017. Interest charge on capital 10% p.a. The amount of interest on capital shown in profit and loss account as on March 31,2017 will be :

(a) ₹ 5,250

(b) ₹ 6,000

(c) ₹ 4,000

(d) ₹ 3,000

5. If the insurance premium paid ₹ 1,000 and pre-paid insurance ₹ 300. The amount of insurance premium shown in profit and loss account will be :

(a) ₹ 1,300

(b) ₹ 1,000

(c) ₹ 300

(d) ₹ 700

Fig. 9.2 : Showing treatment of various types of adjustments

Illustration 1

From the following balances, prepare the trading and profit and loss account and balance sheet as on March 31, 2017.

Adjustments

1. Closing stock ₹ 70,000

2. Create a reserve for bad and doubtful debts @ 10% on book debts

3. Insurance prepaid ₹ 50

4. Rent outstanding ₹ 150

5. Interest on loan is due @ 6% p.a.

Solution

Illustration 2

The following were the balances extracted from the books of Yogita as on March 31, 2017:

Taking into account the following adjustments prepare trading and profit and loss account and balance sheet as on March 31, 2017 :

(a) Stock in hand on March 31, 2017, was ₹ 6,800.

(b) Machinery is to be depreciated at the rate of 10% and patents @ 20%.

(c) Salaries for the month of March, 2017 amounting to ₹ 1,500 were outstanding.

(d) Insurance includes a premium of ₹ 170 on a policy expiring on September 30, 2017.

(e) Further bad debts are ₹ 725. Create a provision @ 5% on debtors.

(f) Rent receivable ₹ 1,000.

Solution

Illustration 3

The following balances were extracted from the books of Shri R. Lal on March 31, 2017:

Prepare the trading and profit and loss account and a balance sheet as on March 31, 2017 after keeping in view the following adjustments :

(i) Depreciate old building by ₹ 625 and addition to building at 2% and office furniture at 5%.

(ii) Write-off further bad debts ₹ 570.

(iii) Increase the bad debts reserve to 6% of debtors.

(iv) On March 31, 2017 ₹ 570 are outstanding for salary.

(v) Rent receivable ₹ 200 on March 31, 2017.

(vi) Interest on capital at 5% to be charged.

(vii) Unexpired insurance ₹ 240.

(viii) Stock was valued at ₹ 14,290 on March 31, 2017.

Solution

Illustration 4

Prepare the trading profit and loss account of M/s Mohit Traders as on 31 March 2017 and draw necessary Journal entries and balance sheet as on that date :

Adjustments

Solution

Illustration 5

The following information has been extracted from the trial balance of M/s Randhir Transport Corporation.

Adjustments

1. Closing stock for the year was ₹ 35,500.

2. Depreciation charged on plant and machinery 5% and land and building 6%.

3. Interest on drawing @ 6% and Interest on loan @ 5%.

4. Interest on investments @ 4%.

5. Further bad debts 2,500 and make provision for doubtful debts on debtors 5%.

6. Discount on debtors @ 2%.

7. Salary outstanding ₹ 200.

8. Wages outstanding ₹ 100.

9. Insurance prepaid ₹ 500.

You are required to make trading and profit and loss account and a balance sheet on March 31, 2017.

Solution

Illustration 6

From the following balances of M/s Keshav Bros. You are required to prepare trading and profit and loss account and a balance sheet of March 31, 2017.

Adjustment

(i) Provision for bad debts @ 5% and further bad debts ₹ 2,000.

(ii) Rent received in advance ₹ 6,000.

(iii) Prepaid insurance ₹ 200.

(iv) Depreciation on furniture @ 5%, plant and machinery @ 6%, building @ 7%.

Solution

Illustration 7

The following information have been taken from the trial balance of M/s Fair Brothers Ltd. You are required to prepare the trading and profit and loss account and a balance sheet as at March 31, 2017.

Adjustments

1. Wages include ₹ 4,000 for erection of new machinery on April 01, 2016.

2. Provide 5% depreciation on furniture.

3. Salaries unpaid ₹ 1,600.

4. Closing stock ₹ 81,850.

5. Create a provision at 5% on debtors.

6. Half the amount of bill is recoverable.

7. Rent is paid up to July 30, 2017.

8. Insurance unexpired ₹ 600.

Illustration 8

From the following balance extracted from the books of of M/s Hariharan Brother, you are require to prepare the trading and profit and loss account and a balance sheet as on December 31, 2017.

Adjustments

1. Closing stock ₹ 14,000.

2. Wages outstanding ₹ 600, Salaries Outstanding ₹ 1,000, Rent outstanding ₹ 200.

3. Fire Insurance premium includes ₹ 1,200 paid in July 01, 2016 to run for one year from July 01, 2016 to June 30, 2017.

4. Apprenticeship Premium is for three years paid in advance on January 01, 2016.

5. Stationery bill for ₹ 60 remain unpaid.

6. Depreciation on Premises @ 5%, furniture @ 10%, Machinery @ 10%.

7. Interest on loan given accrued for one year @ 7%.

8. Interest on investment @ 5% for half year to December 31, 2016 has accrued.

9. Interest on capital to be allowed at 5% for one year.

10. Interest on drawings to be charged to him ascertained for the year ₹ 160.

Solution

Illustration 9

The following balances have been extracted from the trial balance of M/s Kolkata Ltd. You are required to prepare the trading and profit and loss account on dated March 31, 2017.

Also prepare balance sheet on that date.

Adjustments

1. Outstanding salaries ₹ 100. Rent and taxes ₹ 200, Wages ₹ 100.

2. Unexpired insurance ₹ 500.

3. Commission is received in advances ₹ 50.

4. Interest ₹ 500 is to be received on bank deposits.

5. Interest on bank overdraft ₹ 750.

6. Depreciation on furniture @ 10%.

7. Closing stock ₹ 9,000.

8. Further bad debts ₹ 200 New provision @ 5% on debtors.

9. Apprenticeship premium received in advance ₹ 100.

10. Interest on drawings @ 6%.

Solution

Illustration 10

Prepare the trading and profit and loss account of M/s Roni Plastic Ltd. from the following trial balance and a balance sheet as at March 31, 2017.

Adjustments

1. Depreciation on land and building at @ 5% and Motor vehicle at @ 15%.

2. Interest on loan is @ 5% taken on April 01, 2016.

3. Goods costing ₹ 1,200 were sent to a customer on sale on return basis for ₹ 1,400 on March 30, 2017 and has been recorded in the books as actual sales.

4. Salaries amounting to ₹ 1,400 and Rates amounting to ₹ 800 are due.

5. The bad debts provision is to be brought up to @ 5% on sundry debtors.

6. Closing stock was ₹ 13,700.

7. Goods costing ₹ 1,000 were taken away by the proprietor for his personal use but not entry has been made in the books of account.

8. Insurance pre-paid ₹ 350.

9. Provide the manager’s commission at @ 5% on Net profit after charging such commission.

Solution

Do it yourself

1. From the following Trial Balance of M/s Karan on March 31, 2017, prepare a Trading and Profit and Loss Account and a Balance Sheet:

(I) Additional Information

(a) The cost of closing stock was ₹ 50,000 but the market value was ₹ 40,000.

(b) Rent is due but not yet paid for March 2017 ₹ 500.

(c) Insurance carried forward ₹ 900.

(d) 1/3 of the commission received is in respect of work to be done in next year and commission paid represents only 1/4 of the actual commission to be paid during the year.

(e) Vehicles were valued at 90% of the book value.

(f) The Horse worth ₹ 30,000 was donated to a charitable organization.

(II) Name the accounting concept followed while treating the adjustment (a), (b) and (d) above?

2. The following balances were extracted from the books of Avika Enterprises on 31st March 2017.

You are required to :

(i) Prepare final accounts for the year ended March 31, 2017 after giving effect to the following adjustments:

(a) $1/5^{\text {th }}$ of General expenses and Taxes & Insurance to be charged to factory and the balance to the office.

(b) Write off a further Bad debts of ₹ 160 and maintain the provision for doubtful debts at 5% and create a provision for discount on Debtors at 10%.

(c) Depreciate Machinery at 10% and Motor Vehicles by ₹ 240.

(d) Provide ₹ 700 for interest on Bank Overdraft to be paid.

(e) ₹ 50 is to be carried forward to next year out of Insurance.

(f) Provide for Manager’s Commission at 10% on the Net Profit after charging such commission.

(ii) Name the accounting concepts which are followed while treating the adjustment (a), (b) and (d) above?

3. The following balances were extracted from the books of Anushka Enterprises on March 31,2017.

You are required to :

(i) Prepare final accounts for the year ended March 31, 2017 after giving effect to the following adjustments:

(a) Insurance is due but not yet paid for 31 March 2017 ₹ 500.

(b) Salary Unexpired ₹ 900.

(c) Write off a further Bad debts ₹ 2,000 and maintain the provision for bad debts at 5% on Debtors.

(d) Machinery is to be valued at 90% less than the book value.

(e) Goods kept in warehouse worth ₹ 10,0000 were used for staff welfare.

(f) Half of the Bills Receivable were irrecoverable.

(h) Closing Stock is ₹ 40,000.

(ii) Name the accounting concepts which will be followed while treating the adjustment (a), (b), (c) and (d) above?

4. The following balances were extracted from the books of Ankita Enterprises on March 31, 2017.

You are required to :

(i) Redraft the Trial Balance.

(ii) Prepare final accounts for the year ended March 31, 2017 after giving effect to the following adjustments:

(a) Taxes are paid for 10 months only.

(b) Creditors worth ₹ 780 have accepted bills payables.

(c) Depreciate furniture by 10%.

(d) Trucks were depreciated to the extent of ₹ 21,000.

(e) Wages includes ₹ 2,000 for the making of Furniture.

(f) Closing Stock is of ₹ 20,000.

(g) Provide for Manager’s Commission at 10% on the Net Profit before charging such commission.

(h) Land was acquired on 1st April, 2016 by paying a claim at 50% less than market value to the owner.

(iii) Name the accounting principles which will be followed while treating the adjustment (a), (c) and (e) above?

(Correct total of Trial Balance ₹ 2,83,620)

Key Terms Introduced in the Chapter

• Outstanding / Accrued expenses

• Accrued Incomes

• Depreciation

• Provision for doubtful debts

• Managers Commission

• Prepaid/Unexpired expenses

• Income received in advance

• Bad Debts

• Provision for discount on debtors

• Interest on Capital

Summary with Reference to Learning Objectives

1. Need for adjustments: For the preparation of financial statements, it is necessary that all the adjustments arising out of the accrual basis of accounting are made at the end of the accounting period. Another important consideration in the preparation of final accounts with adjustments, is the distinction between capital and revenue items. Entries which are recorded to give effect to these adjustments are known as adjusting entries.

2. Outstanding expenses : At the end of the accounting period sometimes a business enterprises is left with some unpaid expenses due to one reason or another. Such expenses are termed as outstanding expenses.

3. Prepaid expenses : At the end of the accounting year, it is found that the benefits of some expenses have not been fully received; a portion of total benefits would be received in the next accounting year. That portion of the expense, the benefit of which will be received during the next accounting period is known as ‘prepaid expenses’.

4. Accrued Income : These are certain items is received by a business enterprise but the whole amount of it does not belong to the next period. Such portion of income which belongs to the next accounting period is income received in advance and is known as “unearned income”.

5. Depreciation: Depreciation is the decline in the value of an asset an account of wear and tear or passage of time or with. It actually amounts to writing off a portion of the cost of an asset which has been used in the business for the purpose of earning profits. In the balance sheet, the asset is shown at loss minus the amount of depreciation.

6. Provisions for bad and doubtful debts : It is a normal feature of business operations that some debts prove irrecoverable which means that the amount to the realised from them becomes had to view of this. An attempt is made to bring in a certain element of certainty in the amount in respect of bad debts charged every year against incomes.

Questions for Practice

Short Answers

1. Why is it necessary to record the adjusting entries in the preparation of final accounts?

2. What is meant by closing stock? Show its treatment in final accounts?

3. State the meaning of:

(a) Outstanding expenses

(b) Prepaid expenses

(c) Income received in advance

(d) Accrued income

4. Give the Performa of income statement and balance in vertical form.

5. Why is it necessary to create a provision for doubtful debts at the time of preparation of final accounts?

6. What adjusting entries would you record for the following :

(a) Depreciation

(b) Discount on debtors

(c) Interest on capital

(d) Manager’s commission

7. What is meant by provision for discount on debtors?

8. Give the journal entries for the following adjustments :

(a) Outstanding salary ₹ 3,500.

(b) Rent unpaid for one month at ₹ 6,000 per annum.

(c) Insurance prepaid for a quarter at ₹ 16,000 per annum.

(d) Purchase of furniture costing ₹ 7,000 entered in the purchases book.

Long Answers

1. What are adjusting entries? Why are they necessary for preparing final accounts?

2. What is meant by provision for doubtful debts? How are the relevant accounts prepared and what journal entries are recorded in final accounts? How is the amount for provision for doubtful debts calculated?

3. Show the treatment of prepaid expenses depreciation, closing stock at the time of preparation of final accounts when:

(a) When given inside the trial balance?

(b) When given outside the trial balance?

Numerical Questions

1. Prepare a trading and profit and loss account for the year ending March 31, 2017. from the balances extracted of M/s Rahul Sons. Also prepare a balance sheet at the end of the year.

Adjustments

1. Commission received in advance ₹ 1,000.

2. Rent receivable ₹ 2,000.

3. Salary outstanding ₹ 1,000 and insurance prepaid ₹ 800.

4. Further bad debts ₹ 1,000 and provision for doubtful debts @ 5% on debtors and discount on debtors @ 2%.

5. Closing stock ₹ 32,000.

6. Depreciation on building @ 6% p.a.

(Ans : Gross loss ₹ 17,000; Net loss ₹ 43,189; Total balance sheet ₹ 2,83,611)

2. Prepare a trading and profit and loss account of M/s Green Club Ltd. for the year ending March 31, 2017. from the following figures taken from his trial balance :

Adjustments

1. Depreciation charged on machinery @ 5% p.a.

2. Further bad debts ₹ 1,500, discount on debtors @ 5% and make a provision on debtors @ 6%.

3. Wages prepaid ₹ 1,000.

4. Interest on investment @ 5% p.a.

5. Closing stock 10,000.

(Ans. : Gross Profit ₹ 79.000; Net Profit ₹ 52,565; Total Balance Sheet ₹ 1,57,565).

3. The following balances has been extracted from the trial of M/s Runway Shine Ltd. Prepare a trading and profit and loss account and a balance sheet as on March 31, 2017.

Adjustments

1. Further bad debts ₹ 1,000. Discount on debtors ₹ 500 and make a provision on debtors @ 5%.

2. Interest received on investment @ 5%.

3. Wages and interest outstanding ₹ 100 and ₹ 200 respectely.

4. Depreciation charged on motor car @ 5% p.a.

5. Closing Stock ₹ 32,500.

(Ans. : Gross profit ₹ 78,000; Net profit ₹ 66,010, Total balance sheet ₹ 2,97,350).

4. From the following Trial Balance you are required to prepare trading and profit and loss account for the year ending March 31, 2017 and Balance Sheet on that date.

Adjustments

1. Closing stock valued at ₹ 36,000.

2. Private purchases amounting to ₹ 5000 debited to purchases account.

3. Provision for doubtful debts @ 5% on debtors.

4. Sign board costing ₹ 4,000 includes in advertising.

5. Depreciate furniture by 10%.

(Ans : Gross Profit ₹ 1,09,000; Net loss ₹ 4,600; Total balance sheet ₹ 2,98,900).

5. From the following information prepare trading and profit and loss account of M/s Indian sports house for the year ending March 31, 2017.

Adjustments

1. Closing stock was ₹ 45,000.

2. Provision for doubtful debts is to be maintained @ 2% on debtors.

3. Depreciation charged on : furniture and fixture @ 5%, plant and Machinery @ 6% and motor car @ 10%.

4. A Machine of ₹ 30,000 was purchased on October 01, 2016.

5. The manager is entitle to a commission of @ 10% of the net profit after charging such commission.

(Ans. : Gross profit ₹ 1,01,000; Net profit ₹ 68,909; Total balance sheet ₹ 3,43,200; Manager’s commission ₹ 6,891).

6. Prepare the trading and profit and loss account and a balance sheet of M/s Shine Ltd. from the following particulars.

Adjustments

1. Closing stock was valued ₹ 35,000.

2. Depreciation charged on furniture and fixture @ 5%.

3. Further bad debts ₹ 1,000. Make a provision for bad debts @ 5% on sundry debtors.

4. Depreciation charged on motor car @ 10%.

5. Interest on drawing @ 6%.

6. Rent, rates and taxes was outstanding ₹ 200.

7. Discount on debtors 2%.

(Ans. : Gross loss ₹ 17,050; Net loss ₹ 27,482; Total balance sheet ₹ 3,18,894).

7. Following balances have been extracted from the trial balance of M/s Keshav Electronics Ltd. You are required to prepare the trading and profit and loss account and a balance sheet as on March 31, 2017.

The following additional information is available :

1. Stock on March 31,2017 was ₹ 30,000.

2. Depreciation is to be charged on building at 5% and motor van at 10%.

3. Provision for doubtful debts is to be maintained at 5% on Sundry Debtors.

4. Unexpired insurance was ₹ 600.

5. The Manager is entitled to a commissiion @ 5% on net profit after charging such commission.

(Ans. : Gross profit ₹ 37,600; Net profit ₹ 25,381; Total balance sheet ₹ 4,15,350; Manager’s commission ₹ 1,269).

8. From the following balances extracted from the books of Raga Ltd. prepare a trading and profit and loss account for the year ended March 31, 2017 and a balance sheet as on that date.

The additional information is as under :

1. Closing stock was valued at the end of the year ₹, 20,000.

2. Depreciation on plant and machinery charged at 5% and land and building at 10%.

3. Discount on debtors at 3%.

4. Make a provision at 5% on debtors for doubtful debts.

5. Salary outstanding was ₹ 100 and Wages prepaid was ₹ 40.

6. The manager is entitled a commission of 5% on net profit after charging such commission.

(Ans. : Gross profit ₹ 21,240 ; Net profit ₹ 12,664 ; Total balance sheet ₹ 2,23,377 ; Manager’s commission ₹ 633).

9. From the following balances of M/s Jyoti Exports, prepare trading and profit and loss account for the year ended March 31, 2017 and balance sheet as on this date.

Closing stock ₹ 10,000.

1. To provision for doubtful debts is to be maintained at 5 per cent on sundry debtors.

2. Wages amounting to ₹ 500 and salary amounting to ₹ 350 are outstanding.

3. Factory rent prepaid ₹ 100.

4. Depreciation charged on Plant and Machinery @ 5% and Building @ 10%.

5. Outstanding insurance ₹100.

(Ans. : Gross profit ₹ 23,250 ; Net profit ₹ 15,895 ; Total balance Sheet ₹ 76,945).

10. The following balances have been extracted from the books of M/s Green House for the year ended March 31, 2017, prepare trading and profit and loss account and balance sheet as on this date.

Adjustments :

(a) Machinery is depreciated at 10% and buildings depreciated at 6%.

(b) Interest on capital @ 4%.

(c) Outstanding wages ₹ 50.

(d) Closing stock ₹ 50,000.

(Ans. : Gross profit ₹ 83,750 ; Net Profit ₹ 52,750 ; Total balance sheet ₹ 3,27,700).

11. From the following balances extracted from the book of M/s Manju Chawla on March 31, 2017. You are requested to prepare the trading and profit and loss account and a balance sheet as on this date.

Closing stock was ₹ 2,000.

(a) Interest on drawings @ 7% and interest on capital @ 5%.

(b) Land and Machinery is depreciated at 5%.

(c) Interest on investment @ 6%.

(d) Unexpired rent ₹ 100.

(e) Charge 5% depreciation on furniture.

(Ans. : Gross profit ₹ 21,900 ; Net profit ₹ 25,185 ; Total balance sheet ₹ 71,185).

12. The following balances were extracted from the books of M/s Panchsheel Garments on March 31, 2017.

Prepare the trading and profit and loss account for the year ended March 31, 2017 and a balance sheet as on that date.

(a) Unexpired insurance ₹ 1,000.

(b) Salary due but not paid ₹ 1800.

(c) Wages outstanding ₹ 200.

(d) Interest on capital 5%.

(e) Scooter is depreciated @ 5%.

(f) Furniture is depreciated @ 10%.

(g) Closing stock was ₹ 15,000.

(Ans. : Gross profit ₹ 39,200 ; Net profit ₹ 22,780 ; Total balance sheet ₹ 1,03,280).

13. Prepare the trading and profit and loss account and balance sheet of M/s Control Device India on March 31, 2017 from the following balance as on that date.

Closing stock was valued ₹ 20,000.

(a) Interest on capital @ 10%.

(b) Interest on drawings @ 5%.

(c) Wages outstanding ₹ 50.

(d) Outstanding salary ₹ 20.

(e) Provide a depreciation @ 5% on plant and machinery.

(f) Make a 5% provision on debtors.

(Ans. : Gross profit ₹ 29,760 ; Net loss ₹ 8,973 ; Total balance sheet ₹ 1,28,000)

14. The following balances appeared in the trial balance of M/s Kapil Traders as on March 31, 2017

The partners of the firm agreed to records the following adjustments in the books of the Firm: Further bad debts ₹300. Maintain provision for bad debts 10%. Show the following adjustments in the bad debts account, provision account, debtors account, profit and loss account and balance sheet.

(Ans. : Dr. Profit and Loss account ₹ 1,820)

15. Prepare the bad debts account, provision for account, profit and loss account and balance sheet from the following information as on March 31, 2017

Adjustments :

Bad debts `500 Provision on debtors @ 3%.

(Ans. : Credit Profit and Loss account ₹ 115)

Checklist to Test Your Understanding

1. (c), $\quad$ 2. (d), $\quad$ 3. (b), $\quad$ 4. (a), $\quad$ 5. (d)

APPENDIX

Description of Commonly Used Functions in Access

There are three types of functions that are used to set the Control Source property of calculated controls and/or to form part of calculated field expression in SQL statement. A brief description of the commonly used functions is below :

A-1. Domain Aggregate Functions

These functions are used to perform calculations based on values in a field of a table or query. Criteria to select the set of records in the table or query that is desired to be used for calculations may also be specified. The criteria, if not specified, imply that all the records of the table or query specific to the field are used for computation. All the domain aggregate functions use the same syntax as is given hereunder :

DFunction (“FldName”, “TblName” or “QryName”, “SrchCond”)

Wherein DFunction refers to a named domain aggregate function. A brief description of its input arguments is given below:

FldName : It refers to the name of field that is to be searched in a table or query, which is specified as an argument.

TblName (or QueryName) : It refers to the name of a table or query that contains the field specified as second input argument.

SrchCond : It refers to the search condition on the basis of which the relevant record is searched.

Some of the important domain aggregate functions have been described as below :

(a) DLookup : This function is meant to look up information that is stored in a table or query, which is not the underlying source of Access Form or Report. It is used to set the Control Source property of a calculated control to display data from other table or query. Consider the following example:

DLookup (“Name”, “Accounts”, “Code = ‘110001”)

In the above example, this function has been applied to search the name of account (in Accounts table) whose code is ’ 110001 ‘.

(b) DMax and DMin : These functions are used to retrieve respectively the maximum and minimum values in the specified field. Consider the following example :

DMin (“Amount”, “Vouchers”, “Debit = ‘711001’”)

Dmax (“Amount”, “Vouchers”, “Debit = ‘711001’”)

In the above examples, the amount of minimum purchase transaction and maximum purchase transaction is retrieved and reported. It may also be noted that ‘711001’ is the code of Purchase account in Accounts table

(c) DSum : This function computes and returns the sum of the values in the specified field or expression. For Example, in a table : Sales that contains

ItemCode, Price and Quantity as fields, the total amount of sales may be computed by using the DSum () function as follows :

DSum (“Price*Quantity”, “Sales”)

However, if the total sales is to computed for a particular item coded as 1678, the DSum () function shall be applied as follows :

DSum (“Price*Quantity”, “Sales”, “ItemCode = 1678”)

(d) DFirst and DLast : These functions are used to retrieve respectively the values in the specified field from first and last physical records.

Consider the following application examples :

DFirst (“Name”, “Accounts")

DLast (“Name”, “Accounts")

In the above examples, the name first and last account that physically exists in Accounts table is retrieved and reported.

(e) DCount : This function is meant to compute the number of records with non-null values in the specified field. Consider the following application example :

DCount (“*", “Accounts")

In the above example, The number of records in accounts table are counted and reported by DCount () function.

A-2. SQL Aggregate Functions

The SQL aggregate functions have the functionality similar to that of domain aggregate function. However, unlike domain aggregate functions, these functions cannot be called directly into controls used in Forms and Reports of Access. These functions are used in SQL statements that provide the underlying record source of Forms and Reports. All these functions, when used require the GROUP BY clause in SQL statement :

(a) Sum : This function is used to compute and return the sum of a set of values. For Example, consider the following SQL statement that has been used in Chapter-V to prepare the underlying information source of Trial Balance (Model-I.).

SELECT Debit As Code, SUM (Amount) AS Total

FROM VOUCHERS

GROUP BY Debit ;

In the above SQL statement, Sum () has been used to compute the total amount by which the transacted accounts have beeen debited.

(b) Min and Max : These functions are used to retrieve respectively the minimum and maximum of value set with respect to field or query expression. For Example, the following SQL statement is capable of returning the amount of minimum and maximum sales transaction in Model-I :

SELECT Min (Amount) As MinSales, Max (Amount) As MaxSales FROM Vouchers

WHERE Credit = ‘811001’;

It may be noted that the sales account that is coded as ‘811001’ is credited as and when a sales transaction is recorded.

(c) Count: This function counts the number of records returned by a query. The number of times a sales transaction has occurred and recorded in books of accounts can be known by executing the following SQL statement.

SQL statement.

SELECT count (*)

FROM Vouchers

WHERE Credit = ‘811001’

In the above SQL statement, the Credit field stores the account code of sales when a sales transaction occurs. The WHERE clause restricts the number of records returned by the above SQL to those in which credit field has the account code of sales. Accordingly, the count () function returns the count value of records returned by the above SQL statement.

(d) First and Last : These functions are meant to retrieve the first and last record of a value set pertaining to a field or query expression.

A-3. Other Functions

(a) IIF : The purpose of this function is to provide a value to the field from a mutually exclusive set of values. Its syntax is as given below :

IIIF (, Value-1, Value-2)

Wherein refers to any logical expression in which a comparison is made by using following comparison operators :

$=$ equal to

$<$ less than

greater than

$<=$ less than or equal to

$>=$ greater than or equal to

The condition formed by the above comparison operators is evaluated to result into TRUE or FALSE.

This value is returned by IIF() function to the field, if the condition turns out to be TRUE

This value is returned by IIF() function to the field, if the condition turns out to be FALSE

Example : Suppose a field Type is to return the string of characters “Debit” when its value is 0 and “Credit” when its value is 1 , IIF() function is used as shown below :

IIF (Type = 0, “Debit", “Credit")

(b) Abs : The purpose of this function is to return absolute value, This function receives a numeric value as its input argument and returns an absolute value. Consider the following examples on use of Abs ( ) function : When -84 is given as input argument to $\mathrm{Abs}(-84)$, it returns 84 When 84 is given as input argument to $\operatorname{Abs}(84)$, it returns 84 (c) Val : The purpose of this function is to return the numbers contained in a string as a numeric value of appropriate type. Its Syntax is Val(string)

The string argument of the above Val( ) function is any valid string expression. The Val( ) function stops reading the string at the first character that cannot be recognised as number. For example, Val(“12431") returns the value 12431 by converting the enclosed string of numerals into value. However, Val (“12,431") returns the numeric value 12 because comma after 12 in the enclosed string of characters in Val () function is not recognised as number.

Note

Note