ADJUSTMENT ENTRIES FOR FINAL ACCOUNTS (Learn Accounting Free)

ADJUSTMENT ENTRIES
The preparation of income statement or Trading, Profit and Loss Account and Balance Sheet is the last stage of accounting process. According to the principles of double entry system of accounting all the expenses and incomes relating to a particular period whether incurred or not should be taken into account. In order to give the true and fair view of the state of affairs of the business concern, it is essential to consider various adjustments while preparing Trading, Profit and Loss Account and Balance Sheet. The following are the various adjustments usually related to :
(1)         Closing Stock
(2)         Outstanding Expenses
(3)         Prepaid Expenses
(4)         Accrued Income
(5)         Income Received in Advance
(6)         Depreciation
(7)         Interest on Capital
(8)         Interest on Drawings
(9)         Bad Debts
(10)       Provision for Doubtful Debts
(11)       Provision for Discount on Debtors
(12)       Provision for Discount on Creditors
(1) CLOSING STOCK: The term Closing Stock refers to stock of raw materials, work in progress and finished goods at the end of the year valued at cost price or market price whichever is less.
ما لی سال کے آخر پر  جو تجارتی  مال فروخت نہ ہو سکے ( تجارتی عرصہ کے آخری روز موجود سٹاک) اس کو  اختتامی ذخیرہ کہتے ہیں
Adjusting Entry:
Closing Stock Account                     Dr.
To Trading Account                         Cr
Effect of Adjusting Entry:
1. Trading & Profit &Loss   A/c                  Credit Side                    After Net Sales
2. Balance Sheet                        As a Current  Asset
(2)OUTSTANDING EXPENSE/ACCRUED/PAYABLE/ARREARS/OWING/OWED
Outstanding expenses refer to those expenses incurred and remain unpaid during the accounting period. For example, salary, rent, interest etc. are expenses which are incurred but remain unpaid during the accounting period.
واجب الادا اخراجات: اس سے مراد ایسے اخراجات ہیں جو ہو چکے ہیں لیکن ابھی ادا نہیں ہوئے واجب الادا اخراجات کہلاتے ہیں۔ مثال کے طور پر ملازمین سے کام لے لیا لیکن ابھی تک تنخواہ ادا نہیں کی گئ، بجلی کا بل آ  گیا لیکن ابھی تک ادائیگی نہیں کی گئ وغیرہ۔
Adjusting Entry:
Expenses (Salaries) Account                     Dr.
To Outstanding Expenses (Salaries) A/c                  Cr
Effect of Adjusting Entry:
1. Trading and Profit &Loss A/c                    Debit Side                  Plus (+) in (Salaries) Account
2. Balance Sheet                   As a Current Liability
(3) PREPAID EXPENSES /PAID IN ADVANCE/UNEXPIRED EXPENSES:
Prepaid expenses are also known as unexpired expenses. Those expenses which are incurred and paid in advance. Such expenses are actually related to a future period.
پیشگی ادا کردہ اخراجات: اس سے مرا دایسے اخراجات ہیں جن کی ادائیگی پیشگی کر دی گئ ہو لیکن ابھی تک اس سے فائدہ حاصل نہ کیا ہو پیشگی ادا شدہ اخراجات کہلاتے ہیں۔ مثا ل کے طور پر مو بائل فون میں پر ی پیڈ سم کو ری چارج کرنا یعنی رقم کمپنی کو پیشگی ادا کر دی لیکن ابھی تک اس کا فائدہ حاصل نہیں کیا، 2) بلڈنگ کے مالک کو کرایہ پیشگی ادا کرنا   3) کالج کی فیس پیشگی ادا کرنا وغیرہ وغیرہ
Adjusting Entry:
Prepaid (Insurance) Expenses Account                      Dr.
To (Insurance) Expenses Account                           Cr
Effect of Adjusting Entry:
1. Trading & P&L A/c               Debit Side                 Deducted (-) from (Insurance) Account
2. Balance Sheet                  As a Current Assets
(4) ACCRUED INCOME / ARREARS/OUTSTANDING INCOME/RECEIVABLE INCOME:
Accrued Income otherwise known as Outstanding Income. Such incomes are accrued during the accounting period but not actually received in cash during that period.
قابل وصول آمدنی/واجب الاوصول آمدنی: اس سے مرا د  ایسی آمدنی ہے جو  کمائی گئی ہو لیکن ابھی تک وصول نہ ہوئی ہو  واجب الاوصول آمدنی کہلاتی ہے۔ مثال کے طور پر گاہک کی کار رپئیر کر دی لیکن ابھی پیسہ وصول کر نا باقی ہے۔
Adjusting Entry:
Accrued (Repair Fee) Account                           Dr.
To (Repair Fee) Income Account                         Cr
Effect of Adjusting Entry:
1. Profit &Loss A/c                  Credit Side                    Plus (+) in (Repair Fee) Account
2. Balance Sheet                      As a Current Assets
(5) INCOME RECEIVED IN ADVANCE /UNEARNED INCOME:
Any income received in advance which is not earned during the accounting period. Therefore, if any income received in advance, it should be treated as income for the subsequent (Next) year.
پیشگی وصول شدہ آمدنی: ایسی آمدنی جس کی رقم   پیشگی وصول کر لی گئ ہو مگر ابھی تک کما نا باقی ہو (کام نہ کیا ہو) اسے پیشگی وصول شدہ آمدنی کہتے ہیں۔
Adjusting Entry:
(Service Fee) Account                              Dr.
To Unearned (Service Fee) Income Account                  Cr
Effect of Adjusting Entry:
1. Profit &Loss A/c                     Credit Side                 Deducted (-) from (Service Fee) Account
2. Balance Sheet                       As a Current Liability
(6) DEPRECIATION: The term depreciation refers to loss on account of reduced value of assets due to wear and tear, obsolescence, effluxion of time or accident. Depreciation is treated as the cost or loss arised when the asset is used in the normal course of time.
Adjusting Entry:
                                Depreciation Account-(Machinery)                        Dr.
To Accumulated Depreciation Account-(Machinery)                    Cr
Effect of Adjusting Entry:
1. Profit &Loss                                      Debit Side                        As an Indirect Expense
2. Balance Sheet                   Deducted (-) from (Machinery) Account
(7) INTEREST ON CAPITAL: In order to ascertain true profitability of the business concern, it is essential that profit is determined after deducting interest on the capital provided by proprietor. Interest on capital is included in the capital expenditure and thus the adjustment entry will be as follows:
Adjusting Entry:
Interest on Capital Account                  Dr.
To Capital Account                          Cr
Effect of Adjusting Entry:
1. Profit &Loss A/c                  Debit Side                      As an Indirect Expense
2. Balance Sheet                  Added (+) in  Capital Account
(8) INTEREST ON DRAWINGS: It is like a interest on capital provided by the proprietor. Any amount charged as interest on drawings made by the proprietors for his personal use during the particular period is treated as interest on drawings. Interest on drawings should be taken as an income for ascertaining the true profit for a period.
Adjusting Entry:
Drawing Account                  Dr.
    To Interest on Drawings Account                 Cr
Effect of Adjusting Entry:
1. Profit &Loss A/c                          Credit Side                    As an Other Income
2. Balance Sheet                  Liabilities Side                 Added (+) in  Drawing Account                   Deducted (-) from  Capital Account
(9) BAD DEBTS WRITTEN OFF: The term bad debts refer to any amount which are definitely irrecoverable are termed as Bad Debts. It may be treated as actual loss of the business. Any amount irrecoverable due to inability of the debtors, it should be written off from the accounts of debtors. The necessary adjustment entry will be:
Adjusting Entry:
                        Bad Debts Account                Dr
                                    To Debtors Account               Cr
Effect of Adjusting Entry:
1. Profit &Loss A/c                  Debit side              As Expense 
2. Balance Sheet              Asset Side              Deducted (-) from Debtors Account
(10) PROVISION  FOR DOUBTFUL  DEBTS: It is like a bad debt but recovery is doubtful. Thus doubtful debts should not be written off from the books of accounts.  Doubtful debts are treated as anticipated loss therefore making suitable provisions required to be made in the books of accounts.
Adjusting Entry:
Profit and Loss Account                     Dr
                                                            To Provision for Doubtful Account                Cr
Effect of Adjusting Entry:
1. Profit &Loss A/c                             Debit side               As Expense 
2. Balance Sheet              Asset Side             Deducted (-) from Debtors Account
(11) PROVISION  FOR DISCOUNT  ON  DEBTOR: Discount allowed  to debtor is treated  as expenses of a business concern.  Such discounts are allowed to encourage for prompt payment made by the debtors on credit sales.
Adjusting Entry:
                                    Discount Allowed Account                Dr
                                    To Debtors Account               Cr
Effect of Adjusting Entry:
1. Profit &Loss A/c                             Debit side              As Expense 
2. Balance Sheet              Asset Side             Deducted (-) from Debtors Account
(12) PROVISION  FOR DISCOUNT  ON  CREDITOR: It  is like  a discount  on  debtors,  such  discounts  are allowed to make prompt payment due to it creditors. The firm receives such discounts when the  payment made to its creditors in time. It is an anticipated income or profit which is required to create a suitable provision’s in order to ascertain the correct picture of the creditor’s balance
Adjusting Entry:
(a) For Receipt of Discount:
Sundry Creditors Account                  Dr
                                                            To Discount Received Account                      Cr
Effect of Adjusting Entry:
1. Profit &Loss A/c                     Credit side             As Income
2. Balance Sheet              Liability Side             Deducted (-) from Creditors Account
(b) For Provision for  Discount on Creditors:
Provision for Discount on Creditor’s Account               Dr
       To Profit and Loss Account                Cr
Effect of Adjusting Entry:
1. Profit &Loss A/c                    Credit side              As anticipated Income

        

2. Balance Sheet              Liability Side              Deducted (-) from Creditors Account

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