Chapter 10 Financial Statements – II | class 11th | ncert quick revision notes accountancy

Class 11 Accountancy Revision Notes for Financial Statements -II Adjustments of Chapter 10

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Adjustment in preparation of financial statements of Sole-proprietor
Meaning of Adjustment entries: Those entries which need to be passed at the end of the accounting year to show the accurate profit or loss and fair financial position of the business.
Need of Adjustment: There are number of transactions that may not find the place in the Trial Balance due to any reason such as Closing Stock (because it is valued at the end of the year), Manager’s Commission based on Net profits (because its calculation requires preparation of Income Statement first). These transactions can only be taken into account by passing Adjustment entries so that their impact on the profitability and financial position can be shown.
Closing Stock: the closing stock represents the cost of unsold goods lying in the stores at the end of the accounting period.
Outstanding Expenses: 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 the revenue for computation of the correct amount of profit or loss.
Prepaid Expenses: At the end of the accounting year, it is found that the benefits of some expenses have not yet been fully received; a portion of its benefit would be received in the next accounting year. This portion of expenses, is carried forward to the next year and is termed as prepaid expenses.
Accrued Income: It may sometime happen that certain items of income such as a 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. .
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.
Depreciation: It 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.

Closing Stock	Closing Stock A/c	Dr.	(i) Credit side of Trading A/c.
To Trading A/c		(ii) Show on the assets side of BALANCE SHEET.
Outstanding/Unpaid Expenses	Expenses A/c	Dr.	(i) Add to the concerned item on the Debit side of Trading/Profit & Loss A/c.
Outstanding Expenses A/c		(ii) Shown on the liabilities side of BALANCE SHEET.
Prepaid expenses/Unexpired expenses	Prepaid Expenses A/c	Dr.	(i) Deduct from the concerned expenses on the debit side of Profit & Loss A/c
To Expenses A/c		(ii) Show on the assets side of BALANCE SHEET.
Accrued income/ Income due but not received	Accrued Income A/c	Dr.	(i) Add to the concerned income on Credit side of Profit and Loss A/c
To Income A/c		(ii) Show on the assets side of BALANCE SHEET.
Unearned income/Income received in Advance	Income A/c	Dr.	(i) Deduct from the concerned income on the credit side of Profit & Loss A/c
To Unearned Income A/c		(ii) Show on the liabilities side of Balance Sheet.
Depreciation	Depreciation A/c	Dr.	(i) Show on the debit side of Profit Loss A/c
To Asset A/c		(ii) Deduct from the concerned asset in the Balance Sheet.

Bad Debts : The debtors from whom amounts cannot be recovered are treated in the books of accounts as bad and are termed as bad debts.
Further Bad Debts : These Bad debts is a loss that occurred after reparation of Trial Balance. Further bad debts be added in the bad debts already appearing in the Profit and Loss Ae and Debtors would be reduced with the same amount.

To write off bad debts	Bad Debts A/c	Dr.	(i) Debit side of P&L A/c.
To Debtors		(ii) Deduct from debtors on the as- sets side of Balance Sheet.
Provision for bad and doubtful debts	Provision for Doubtful Debts A/c	Dr.	(i) Debit side of P & L A/c.
To Debtors A/c		(ii) Deduct from debtors on the assets side of Balance Sheet.
Provision for discount on debtors	P & L A/c	Dr.	(i) Debit side of P & L A/c.
To Provision for Discount on Debtors Debtors A/c		(ii) Deduct from debtors on the assets side of Balance Sheet.

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.
1. Commission on net profits before charging such commission

Interest on Capital	Interest on Capital A/c	Dr.	(i) Debit side of P & L A/c.
To Capital A/c		(ii) Add to capital on the liabilities side of Balance Sheet.
Interest on drawings	Capital/Drawings A/c	Dr.	(i) Credit side of P & L A/c.
To Interest on Drawings A/c		(ii) Deduct from capital on the liabilities side of Balance Sheet.
Interest payable on loan (borrowed)	Interest on Loan A/c	Dr.	(i) Debit side of P & L A/c.
To Loan A/c		(ii) Add to loan on the liabilities side of Balance Sheet.
Commission payable to manager	P& L A/c	Dr.	(i) Debit side of P & L A/c.
To Comm. Payable to manager A/c		(ii) Show on the liabilities side of Balance Sheet.

Adjustment in Respect of Goods
Abnormal Loss : Sometimes losses occur due to some abnormal circumstances such as accident, fire, flood, earhquakes etc. Such losses are called Abnormal losses. These may be divided into two categories :-
(A) Loss of Goods (B) Loss of fixed assets
Good taken for personal use {Drawings in goods) : When the goods are withdrawn by proprietor for personal use the cost of such goods deduct from purchases and the amount should be deduct from capital in Balance Sheet.
Goods distributed as free samples : Sometime goods are distributed as free sample by the businessman for the purpose of advertisement. The cost of free sample deduct from purchase and shown in Debit side of profit and loss account.
Abnormal loss of goods by fire, theft, accident, etc.

Adjustment	Treatment in Trading & P & L A/c	Treatment in Balance Sheet
1) Loss of Goods (By accident, Fire, Theft)	1) Loss of … A/c	Dr.	(i) Gross Loss: Deduct from Purchases or show on the credit side of Trading A/c.
To Trading A/c (or)
To Purchases A/c
If goods were note insured	2) P & L A/c	Dr.	(ii) Net Loss: Debit side of P & L A/c.
To Loss by …… A/c
If goods were insured and full claim accepted by insurance company	2) Insurance company A/c	Dr.	(iii) Insurance claim: Assets side of Balance Sheet.
To Loss by … A/c
If full claim not accepted by Insurance Company	2) Insurance Company A/c	Dr.
Profit & Loss A/c	Dr.
To Loss By …. A/c
2) Goods taken by the proprietor for his personal use	Drawings A/c	Dr.	(i) Deduct the amount of goods from the purchases in Trading A/c.
To Purchases A/c		(ii) Deduct the amount from the capital on the liabilities side of Balance Sheet.
3) Goods distributed as free samples	Advertising A/c	Dr.	(i) Deduct the amount of goods from the purchases in Trading A/c.
To Purchases A/c		(ii) Show on the debit side of P & L A/c.
4) Goods given as charity	Charity A/c		(i) Deduct the amount from the purchases on the debit side of Trading A/c.
To Purchases a/c		(ii) Show on the debit side of P & L A/c.

Key Points:

1. If closing stock is shown in Trial Balance then it will be shown in balance sheet only. It is assumed that purchases amount already gets adjusted in trial balance.
2. Salary and wages will be shown in profit and loss A/c debit side (assuming that salary is prominent) while wages and salary will be shown in trading A/c debit side, (wages are prominent).
3. Freight, carriage, cartage will be shown in Dr. side of trading A/c. if inward word attached with these then it also debited to trading A/c, if outward word attached with these item then it will be debited to profit and loss account.
4. Any expenses related to factory are debited to trading account like factory lighting, factory rent if factory word is not given then lighting and rent will be debited to profit and loss account.
5. Trade expenses always debited to profit and loss A/c not as name indicate trading A/c.
6. Packaging material: cost of packaging material used in product are direct expenses as it refers to small containers which form part sold, it will debited to trading A/c.
7. Packing: the packing refers to the big containers that are used for transporting the goods and regarded as indirect expenses and debited to profit and loss account.
8. Adjusted purchases mean the amount of purchases is adjusted by way of adding opening stock and reduced by the amount of closing stock, e.g., purchases Rs. 1,00,000; opening stock Rs. 12,000, closing stock Rs. 8,000. Calculate adjusted purchases.
   Adjusted purchases = purchases + opening stock – closing stock
   = Rs. 1,00,000 + Rs. 12,000 – Rs. 8,000 = Rs. 1,04,000
   When adjusted purchases is given in trail balance, then there is no need of debiting opening stock and crediting closing stock in trading A/c.
   In this case closing stock will be shown in balance sheet only.