Final Accounts and Simple Adjustments

Introduction

• Final accounts include trial balance and adjustments.
• Trial Balance amount appears only once in one of the: Trading Account, Profit and Loss Account, or Balance Sheet.
• Adjustment amounts appear twice: once in Trading or Profit and Loss Account and once in the Balance Sheet.
• Important: Adjustments -> Two effects.

Key Basic Adjustments

1. Closing Stock

• Appears in the adjustment only.
• **Two effects: **
  • Trading Account: Credit side.
  • Balance Sheet: Asset side (because it’s an asset).

2. Outstanding Expenses

• Expenses due/payable.
• **Two effects: **
  • Trading/Profit and Loss Account: Debit side (added to existing expenses).
  • Balance Sheet: Liability side (since it's a payable expense).

3. Prepaid/Unexpired Expenses

• Amount paid in advance.
• **Two effects: **
  • Profit and Loss Account: Deduct from respective expenses (like prepaid rent).
  • Balance Sheet: Asset side (since payment is for a future expense).

4. Outstanding/Accrued Income

• Income receivable.
• **Two effects: **
  • Profit and Loss Account: Credit side (add to income).
  • Balance Sheet: Asset side (receivable income is an asset).

5. Income Received in Advance

• Income received before it's due.
• **Two effects: **
  • Profit and Loss Account: Deduct from credit side income.
  • Balance Sheet: Liability side (as it's a liability until it's earned).

6. Depreciation

• Decrease in value of fixed assets.
• **Two effects: **
  • Profit and Loss Account: Debit side (expense).
  • Balance Sheet: Deduct from the respective asset.

7. Interest on Capital

• Interest paid on capital.
• **Two effects: **
  • Profit and Loss Account: Debit side (expense).
  • Balance Sheet: Add to capital in liabilities.

8. Interest on Drawings

• Interest charged on drawings made by owner.
• **Two effects: **
  • Profit and Loss Account: Credit side (income).
  • Balance Sheet: Deduct from capital in liabilities.

9. Bad Debts

• Debts that are not collectible.
• **Two effects: **
  • Profit and Loss Account: Debit side (loss).
  • Balance Sheet: Deduct from debtors (asset side).

10. Goods Distributed as Free Samples

• Used for promotion or increased sales.
• **Two effects: **
  • Trading Account: Deduct from purchases.
  • Profit and Loss Account: Debit side (loss).

Conclusion

• In future sessions, tough and rare adjustments will be discussed.
• Make use of these learnings, especially if enrolled in CA, CMA, M.Com, MBA, B.Com, or intermediate courses.

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