ADJUSTMENT IN FINAL ACCOUNTS

Final Accounts: The trading and profit & loss account and balance sheet prepared at the end of a year is known as Final accounts.

Adjustments: The transactions which have not yet been journalised, appended to the trial balance are what we call adjustments.

Various Adjustment in Final Accounts:

• Expenses owing • Prepaid expense• Accrued income• Income received in advance• Depreciation• Bad debt• Goods drawings by the owner for his personal use

First task is to find out the two accounts involved.

Expenses - Outstanding/Prepaid

•these are the expenses incurred during the year but not paid in cash

•This amount will be paid in the near future (next year).

•It is shown as current liability in balance sheets.

•In two entry system:•Debit     Expenses account

•Credit   Expenses owing account

Outstanding expense:

•This is the expense paid during the year for the benefit of the next year.

•The portion of the expense which is prepaid is to be deducted from the total expenses already paid during the year 

•It is shown as current asset in the balance sheet.

•In two entry system:•Debit     Prepaid expense account and

•Credit   Expense account

Prepaid expense:

Incomes - Outstanding/Pre-received

•The income earned during the year but not received in cash is known as accrued income.

•The amount of accrued income is to be considered as current year’s income and added with the concerned income received during the year

•It is shown as current asset in balance sheet.

•In double entry system:•Debit    Accrued income account and

•Credit   Income account

Outstanding Income: (Accrued income)

•This is the income received during the year for the services to be rendered during the next year.

•Since this income is not related to the current year, it should be deducted from the concerned income .

•It is shown as current liability in balance sheet.

•In double entry system:•Debit    Income account and

•Credit   Income received in advance

Pre-received Income:

Other Adjustments

•The part of the cost of a fixed asset that is consumed by a business during the period of its use is known as depreciation.

•It is considered as an expense in the business therefore shown as an expense in the profit & loss account .

•It is deducted from the cost price of the concerned fixed asset in the balance sheet.

•In double entry system:•Debit    Profit & loss account and

•Credit   Depreciation account

Depreciation:

•The part of the amount of debtors which cannot be recovered is known as bad debt.

•it is known as bad debt written off and shown in the profit & loss account only.

•In the double entry system:•Debit    Bad debt account and

•Credit   Debtors account

Bad debt: