CHAPTER: 8 FINANCIAL STATEMENTS 2

Need for Adjustments

➢ According to accrual concept of accounting, the profit or loss for an accounting year is not based on
the revenues realized 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
➢ 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. Abnormal loss
11. Goods taken for personal use
12. Staff welfare
13. Manager’s commission
14. 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.
Adjustment Treatment in trading & P/L Treatment in balance sheet
A/c
Closing stock Credit side of the Trading A/c. Assets side under current
assets
Outstanding Expenses a) Direct expenses like wages Shown on liabilities side under
etc shown on debit side of the head current liabilities.
Trading A/c as added to the
concerned expense
b) Indirect expenses kike
salaries etc shown on debit side
as added item to the concerned
expense
Prepaid/Unexpired expenses On debit side of the P&L A/c Shown on Assets side under
like insurance etc as they are deducted from the the head current assets.
concerned expenses on debit
side
Incomes earned but not On credit side of the P&L A/c Shown on Assets side under
received like accrued interest, as they are Added to the the head current assets
commission etc concerned incomes
Incomes received in advance On credit side of the P&L A/c Shown on liabilities side under
like commission etc. As they are deducted from the the head current liabilities
concerned income on debit
side
Depreciation On debit side of the P&L A/c Shown on Assets side of the
as they are used part of fixed Balance sheet as a deduction
assets from concerned asset
Bad debts Debit side of the P& L A/c As a deduction from concerned
asset (from debtors)
Provision for bad and doubtful Debit side of P&L A/c as an As a deduction from concerned
debts addition to bad debts asset (from debtors)
Interest on capital Debit side of the P& L A/c Shown on liabilities side as an
addition to capital
Managers commission Debit side of the P& L A/c Shown on liabilities side as
Outstanding expense under the
head current liabilities
Abnormal Loss Total loss is first Credited to The Insurance claim receivable
Trading A/c should be shown on the asset
Actual loss is to be debited to side of the Balance sheet under
P/L A/c as abnormal Current Assets
(non-operating loss)

Goods taken for personal use Shown on the debit side of Shown on the liability side of
Trading A/c as deduction from the Balance sheet as an
Purchases. addition to drawings.
Goods taken for Staff welfare Shown on the debit side of NA
Trading A/c as deduction from
 Shown on the debit side of the
P/L Account as an addition to
Salary.

ADJUSTMENT JOURNAL ENTRIES:

Adjustment Adjustment Entry Treatment in Trading Treatment in

and Profit and Loss Balance Sheet
Account
1. Closing stock Closing stock, A/c Dr. To Shown on the credit Shown on the assets
Trading A/c assets side and profit and side
loss account
2. Outstanding Expense A/c Dr. Added to the respective Shown on the
expenses To outstanding expense A/c expense on the debit side liabilities side

3. Prepaid/ Prepaid expense A/c Dr. Deducted from the Shown on the assets
Unexpired expenses To Expenses A/c respective expense on side
the debit side
4. Income earned but Accrued income A/c Dr. Added to the respective Shown on the assets
not received To Income A/c income on the credit side side

5. Income received Income A/c Dr. Deducted from the Shown on the
in advance To Income received in advance respective income on the liability’s sides
A/c credit side
6. Depreciation Depreciation A/c Dr. Shown on the debit side Deducted from the
To Assets A/c value of asset

7. Provision for bad Profit and Loss A/c Dr. Shown on the debit side Shown as deduction
and doubtful debts To Provision for doubtful debts from debtors

8. Provision for Profit and Loss A/c Dr. Shown on the debit side Shown as deduction
discount on debtors To Provision for discount debtors form debtors

9. Manager’s Manager’s
commission commission A/c Dr. Shown on the debit side Shown on the
To outstanding commission A/c liabilities side

10. Interest on Interest on capital A/c Dr. Shown on the debit side Shown as addition
capital To capital A/c to capital

11. Further bad debts Bad debts A/c Dr. Shown on the debit side Deducted from
To Sundry Debtors A/c debtors
2 The following balances appeared in the Trial Balance of Kanpur Mobiles as at 31st March 2023:
Sundry Debtors ₹ 3,05,000
Bad Debts ₹ 5,000
Provision for bad debts ₹ 20,000
The firm agreed to record the following adjustments in the books of accounts. Further Bad
Debts ₹ 3,000; maintain provision for bad debts 10%. Show the treatment of the above adjustments
in Profit & Loss Account and in Balance sheet as on 31st March 2023.

Ans:
Profit & Loss Account (for the year ended 31st March 2023)
Particulars ₹ Particulars ₹
To Provision for Bad Debts A/c:
Bad
Debts 5,000
+ Further Bad debts 3,000
8,000
+ New
Provision 30,200
38,200
-Old
Provision 20,000 18,200

Balance Sheet (As on 31st March 2023)

Liabilities ₹ Assets ₹
Sundry
Debtors 3,05,000
- Further Bad
debts 3,000
3,02,000
- New Provision 30,200 2,71,800
(10% of 3,02,000)
 6 marks questions
1 From the following particulars, you are required to Prepare Trading and Profit & Loss Account for
the year ending 31st March, 2022 and Balance Sheet as at that date.
Trial Balance
As at 31st march 2022
Particulars Dr. Amount Particulars Cr. Amount
Cash In Hand 30 Capital 7,670
Purchases 8,990 Sales 11,060
Cash at Bank 885 Creditors 1,890
Fixtures & Fittings 225 Bills Payable 1,875
Freehold Premises 1,500 Discount Received 445
Lighting And Heating 65
Bills Receivable 825
Sales Returns 30
Salaries 1075
Debtors 5,700
Opening Stock 3,000
Printing 225
Rates And Insurance 190
Discount Allowed 200
 Total 22,940 Total 22,940

Adjustment: -
• Stock in hand at the end of the year was valued at Rs.1,800.
• Depreciation Fixtures and Fittings by Rs.25.
• Rs. 35 was due and unpaid in respect of salaries.
• Insurance had been paid in advance to the extent of Rs.40.

Trading and Profit &Loss Account For the year ending 31st March,2022
Particulars Amount Particulars Amount
Rs Rs
Opening stock 3000 Sales 11060
Purchase 8990 Less: Returns 30 11,030
Lighting and heating 65 Closing stock 1800
Gross profit 775
12830 12830

Salaries 1075 Gross Profit 775

Add: outstanding 35 1110 Discount received 445
Printing
Rates and Insurance 190
Less: Prepaid 40 150
Discount 200 Net loss 490
Depreciation on furniture and 25
fixture
Total 1710 Total 1710

Balance sheet as on--------------------

Outstanding salaries 35
Cash in Hand 30
Bills payable 1875
Cash at Bank 885
Creditors 1890
Closing stock 1800
Capital 7670 Furniture and fixture 225
Less:net loss 490 7180 Less: depreciation 25 200
Prepaid insurance 40
Debtors 5,700
B/R 825
Freehold premise 1,500
Total 10,980 Total 10,980
2 From the following balance of M/s Keshav Brothers. you are required to Prepare Trading and
Profit & Loss Account for the year ending 31st March, 2018 and Balance Sheet as at that date
from the following particulars: -
Trial Balance As at 31st March 2018
Total 8,70,430 Total 8,70,430
Adjustment: -
a. Provision for bad debts @ 5% and further bad debts Rs. 2,000.
b. Rent received in advance Rs. 6,000.
c. Prepaid insurance Rs. 200.
d. Depreciation on furniture @5%, Plant and Machinery @6% and building @7%.
 e. Closing stock is valued at Rs. 70,000.

M/s Keshav Bros.

Trading and Profit& loss Account (For the year ending 31st March 2018)
Particulars Amount Particulars Amount
Rs. Rs.
To Opening Stock 60,000 By Sales 3,00,000
To Purchase 250000 (–) Returns 2,000
(–) Returns 2500 2,47,500 2,98,000
To factory Rent 1,450 By Closing stock 70,000
To Wages 1,200
To Carriage Inwards 500
To Gross Profit c/d 57,350
3,68,000 3,68,000

To Salary 2,500 By Gross profit b/d 57,350

To Interest 2,000 By Rent
To Carriage Outwards 700 Received 10380
To Office Rent 2,300 (–) Advance 6000 4,380
To Insurance 780 By Commission Received 16,000
(–) Prepaid 200 580
To commission 500
To old Bad Debts 3500
(+) New b/debts 2000
(+) New provision 2400
7900
(–) old provision
for b/d 1550 6350
To Depreciation
Furniture 1125
Plant and Mach. 7800
Building 19600 28525
Net profit (transferred to cap.) 34275

Total 77730 Total 77730

3
Prepare Trading and Profit & Loss Account for the year ended on 31st March, 2023 from the
following particulars;
Trial Balance
(As on 31st March, 2023)
Dr. ₹ Cr. ₹
Cash in hand 2,000
Cash at Bank 18,000
Purchases and Sales 2,20,000 3,50,000
Return inwards and Return outwards 6,000 7,500
Carriage inwards 4,400
Carriage outwards 2,100
Fuel and Power 15,500
 Stock as on 01-04-2022 36,000
Bad debts 6,200
Bad debts provision 2,500
Debtors and Creditors 82,000 30,000
Capital 2,17,000
Investments 20,000
Interest on investments 2,000
Loan from X @ 18% 10,000
Repairs 1,520
General Expenses 10,600
Land and Buildings 1,80,000
Wages and Salaries 18,000
Sundry receipts 120
Bills Payable 5,200
Stationery 2,000
6,24,320 6,24,320
Additional information:
a. Closing stock is valued at ₹ 50,000.
b. Entire stationery was used by the proprietor for own purpose.
c. Write-off ₹ 2,000 as bad debts, and provision for Doubtful Debts is to be maintained at 5%
on Debtors.
d. Loan from X was taken on 1st August 2022. No interest has been paid so far.
e. Included in general expenses is insurance premium ₹ 1,200 paid for one year ending 30th
June 2023.
f. 1/3rd of Wages and Salaries is to be charged to Trading Account and balance to P/L A/c.

Trading Account and Profit & Loss Account (for the year ended 31st March 2023)
Particulars ₹ Particulars ₹
To opening stock 36,000 By Sales 3,50,000
To Less : S Return 6,000 3,44,000
purchases 2,20,000
Less : P. 2,12,500 Closing Stock 50,000
Return 7,500
To carriage inwards 4,400
To Fuel and Power 15,500
To Wages and Salaries 6,000
To Gross Profit c/f 1,19,600
3,94,000 3,94,000
To Carriage outwards 2,100 By Gross Profit b/f 1,19,600
To Wages and Salaries 12,000 By Interest on 2,000
investments
To Repairs 1,520 By Sundry receipts 120
To General
Expenses 10,600
Less: Prepaid 10,300
Insurance 300
To Bad-Debts 6,200
Add : further bad debt 2,000
Add : new provision 4,000
 12,200
Less: old provision 2,500 9,700
To outstanding Interest 1,200
(10,000*18%*8/12)
To Net Profit t/t Capital A/c 84,900
1,21,720 1,21,720
st
4 Prepare Profit & Loss Account and Balance Sheet as on 31 March, 2023 from the following
particulars;
Dr. ₹ Cr. ₹
Capital 3,20,000
Building 4,00,000
Motor Bike 40,000
Gross Profit 2,83,000
Bad debts 3,000
Bad debts provision 7,000
Bank loan 50,000
Interest on Bank loan 3,000
Commission 9,000
Motor Bike expenses 4,000
Salaries 44,000
Cash in hand 29,200
Debtors and Creditors 30,000 20,000
Income Tax 12,000
Income Tax paid in advance 4,000
Interest on advance payment of income tax 200
Closing Stock 1,20,000
6,89,200 6,89,200

Additional information:
a. Commission includes ₹ 3,000 received in advance.
b. Salaries have been paid for 11 months.
c. Bank loan has been taken at 10% p.a. interest.
d. Depreciate building by 5% and Motorbike by 15%.
a. Write-off ₹ 2,000 as bad debts and provision for Doubtful Debts is to be maintained at 5%
on Debtors.
Profit & Loss Account (for the year ended 31st March 2023)
Particulars ₹ Particulars ₹
 To Interest on Bank By Gross Profit b/f
loan 3,000
Add: O/S
Interest 2,000 5,000
To Motor Bike expenses 4,000
To
Salaries 44,000
Add :O/S Salaries
(44000/11*1) 4,000 48,000
To Depreciation
Building 20,000
Motorbike 6,000 26,000

To Net Profit t/t Capital A/c 2.06,600

Balance Sheet (As on 31st March 2023)

Liabilities ₹ Assets ₹
Bank loan 50,000 Cash in hand 29,200
Add: O/s Interest 2,000 52,000 Sundry Debtors 30,000
Creditors 20,000 - Further Bad
O/S Salaries 4,000 debts 2,000
Commission received in advance 3,000 28,000
Capital 3,20,000 -New Provision for BD
Add: Net 1,400 26,600
profit 2.06,600 Closing Stock
5,26,000 Motor Bike 40,000
Less : drawings 15,800* 5,10,800 Less: depreciation 6,000 34,000
Building 4,00,000
Less: Depreciation 20,000 3,80,000
Total 5,89,800 Total 5,89,800
* ₹ 12,000+ ₹ 4,000 – ₹ 200 = ₹ 15,800
5 From the following Trial Balance of Mohan, prepare Trading and Profit & Loss Account for the
year ending 31st March 2023 and a Balance Sheet on the same date after making necessary
adjustments: -
Name of the account Debit Credit
Stock on 01-04-2022 40, 000 -----
Capital --- 1, 50, 000
Purchase 80, 000 -----
Sales ---- 1 60, 000
Wages 20, 000 -----
Salaries 40, 000 -----
Outstanding Salaries ---- 4, 000
Import Duty 2, 000 -----
Carriage Outwards 3, 000 -----
Loan ----- 50, 000
Investment 40, 000 -----
Debtors 62, 000 ------
 Creditors ----- 30, 000
Bad debts 3, 000 ------
Provision for doubtful debts ----- 4, 000
Fire Insurance 5, 000 -----
Life Insurance 7, 000 ------
Advertisement 10, 000 ------
Goodwill 8, 000 ------
Machinery 50, 000 ------
Returns Inwards and Return Outwards 3, 000 2, 000
Cash 7, 000
B/R 15, 000
Interest on Loan 5, 000 -----
4, 00, 000 4, 00, 000
Adjustments: -
1. Closing Stock was valued at Rs. 40,000( Market Price Rs. 50,000)
2. Wages were paid for 10 months only.
3. Create a Provision for Bad and Doubtful debts on Debtors @5%.
4. Depreciate Machinery by 12%.
Trading & P/L Account for the year ended 31st March 2024
Particulars ₹ Particulars ₹
To opening stock 40,000 By sales 1,60,000
To purchases 80,000 (-) Returns 3,000 1,57,000
(-) Returns 2,000 78,000 By Closing Stock 40,000
To wages 20,000
(+) O/S Wages 4,000 24,000
To import duty 2,000
To gross profit 53,000
1,97,000 1,97,000

To salary 40,000 By gross profit 53,000

To carriage Outward 3,000
To Bad debts 3,000
(+)New
provision 3,100
6,100
(-) Old Provision 4,000 2,100
To fire insurance 5,000
To advertisement 10,000
To depreciation on Machinery 6,000 By net loss 18,100
To interest on loan 5,000
71,100 71,100

Balance Sheet As at 31st March 2023

Liabilities ₹ Assets ₹
loan 50000 Cash 7,000
O/s Wages 4,000 Investment 40,000
O/s Salary 4,000 Debtors 62,000
Creditors 30,000 (-)New Provision. 3,100 58,900
Capital 1,50,000 Good will 8,000
 (-) Net loss 18100 Machinery 50,000
1,24900 (-)Dep 6,000 44,000
(-) Drawing 7,000 B/R 15,000
(LIC premium) Closing Stock 40,000
Total 2,12900 Total 2,12900

6 From the following balances of R Ltd and adjustments, prepare Trading and Profit & Loss Account
for the year ending 31.03.2021 and Balance Sheet as on that date
Particulars Amount Particulars Amount
Opening Stock 15,000 Rent 4,000
Purchases 1,09,000 Rent Outstanding 600
Sales 1,80,000 Provision for Doubtful Debts 1,000
Manufacturing Wages 8,000 Furniture 5,000
(Includes Purchased on
01.10.2020 for Rs 1,000)
Fuel, power, light 12,000 Bills Receivable 6,000
Salaries 11,000 Bills Payable 1,600
Bad Debts 500 Machinery 72,000
Income Tax 5.500 Sundry Debtors 28,000
Loan to Manav 5,000 Sundry Creditors 13,000
Interest on Loan to Manav 300 Capital 1,00,000
Commission Received 4,500
Cash in hand 20,000
Adjustments
(a) Closing Stock at cost was Rs 35,000. Its net realisable value (market value) was Rs 30,000.
(b) Write off further Rs 500 as bad debt.
(e) Depreciate furniture by 10% p.a
(f) Salaries for the month of March, 2021 were outstanding
Trading A/c and Profit and loss A/c For the year ending 31st march 2021
Particulars Amount Particulars Amount
To Opening Stock 15,000 By Sales 1,80,000
To Purchases 1,09,000 By Closing Stock 30,000
To Manufacturing Wages 1,80,000
To Fuel, Power and Light 12,000
To G/P C/d 66,000
2,10,000 2,10,000

To Rent 4,000 By G/P B/d 66,000

Bad debt 500 By Interest on Loan 300
Add: Further Bad Debts 500 By Commission 4,500
Less Provision for 1,000
DD(old) ( 1,000) 0
To Salaries 11,000
Add Outstanding 1,000 12,000
To Depreciation on Furniture 450
To N/P 54350
70800 70800