Financial statementsFinancial statements

Adjustments to financial Adjustments to financial statementsstatements

Outstanding Expenses Outstanding Expenses

Expenses due in the current accounting Expenses due in the current accounting period period

Payment is made in the next accounting Payment is made in the next accounting period period

For Eg: For Eg: Salary account in the ledger Salary account in the ledger shows Rs. 250,000/- at the end of shows Rs. 250,000/- at the end of the year ( 31-3-2007), means total the year ( 31-3-2007), means total amount of salary paid for the year amount of salary paid for the year is Rs. 250,000/- . This may not is Rs. 250,000/- . This may not include the salary for the MARCH.include the salary for the MARCH.

Suppose last months salary is Rs. Suppose last months salary is Rs. 25,000/- this will be paid in the next 25,000/- this will be paid in the next accounting year. Ie., in April 2007accounting year. Ie., in April 2007

Salary for the month of March is Salary for the month of March is considered as considered as OUTSTNDING SALARYOUTSTNDING SALARY

Treatment of out standing Treatment of out standing ExpensesExpenses

Will be added to the respective item of Will be added to the respective item of expenses in the Trading account or Profit expenses in the Trading account or Profit and loss account and loss account ( For Debit aspect )( For Debit aspect )

The out standing salary account will be The out standing salary account will be shown in the liability side of Balance shown in the liability side of Balance sheet under the heading Current sheet under the heading Current liabilities liabilities ( for Credit aspect )( for Credit aspect )

Pre paid Expenses Pre paid Expenses

Opposite to outstanding expensesOpposite to outstanding expenses

Expenses which are paid in the current Expenses which are paid in the current year , but will be due for payment in the year , but will be due for payment in the next year. next year.

For Eg: Insurance premium Rs. 60,000/- for the For Eg: Insurance premium Rs. 60,000/- for the period 1period 1stst January 2007 to December 31 January 2007 to December 31stst 2007 2007 is paid as on 1is paid as on 1stst January. January.

Out of Rs.60,000 paid , 3 months insurance Out of Rs.60,000 paid , 3 months insurance premium is for the current financial year and premium is for the current financial year and rest is for the subsequent financial year.rest is for the subsequent financial year.

Ie., Rs.45,000/- is pre paid insurance premium Ie., Rs.45,000/- is pre paid insurance premium

Will be deducted from the respective head Will be deducted from the respective head of expenses in Profit and loss account or of expenses in Profit and loss account or the trading account the trading account ( Credit aspect )( Credit aspect )

Will be shown on the assets side of the Will be shown on the assets side of the balance sheet under the heading current balance sheet under the heading current assets.( debit aspect )assets.( debit aspect )

Treatment of Pre paid expenses Treatment of Pre paid expenses

Accrued Income Accrued Income

Income is due for the current year , Income is due for the current year ,

but received in the next financial year. but received in the next financial year.

Interest on fixed deposit Rs. 50000 due on Interest on fixed deposit Rs. 50000 due on 28-03-07. But the amount is not received in the 28-03-07. But the amount is not received in the

current financial year. (2006-07)current financial year. (2006-07)

As at the year end,( 31.3.2007) the amount As at the year end,( 31.3.2007) the amount Rs. 50,000 will be considered as income due Rs. 50,000 will be considered as income due but not received or accrued income. but not received or accrued income.

Treatment of Accrued Income Treatment of Accrued Income

Accrued Income should be added to Accrued Income should be added to the concerned income in the credit the concerned income in the credit side of the profit and loss account side of the profit and loss account ( credit aspect )( credit aspect )

Same amount should be shown in the Same amount should be shown in the balance sheet assets side under balance sheet assets side under current liabilitiescurrent liabilities( Debit aspect )( Debit aspect )

Income received in Advance Income received in Advance

An Income which is due in the next An Income which is due in the next accounting year but accounting year but

But received in the current year.But received in the current year.

Treatment of Income received in Treatment of Income received in Advance Advance

Income received in advance should be Income received in advance should be deducted from the concerned income in deducted from the concerned income in the Profit and Loss account credit side the Profit and Loss account credit side (for (for Debit aspect )Debit aspect )

Should be shown in the balance sheet Should be shown in the balance sheet liability side under the current liabilitiesliability side under the current liabilities

(for credit aspect )(for credit aspect )

Adjustment related to debtors Adjustment related to debtors

Sundry debtors :

The sum total of amounts , which the customers owe to the business for purchasing goods on credit known as Sundry debtors

Classification of DebtClassification of Debt

Good debt : Sure to be realized

Doubtful debts : May or may not be realised

Bad debts : Irrecoverable or unrealizable debts

Bad Debt Bad Debt

If the bad debt is given in the Trial balance If the bad debt is given in the Trial balance :-:- to be debited in the profit and loss to be debited in the profit and loss account account

If the bad debt is given in the adjustment :-If the bad debt is given in the adjustment :-• Debit in the Profit Loss account Debit in the Profit Loss account • Deduct from Sundry DebtorsDeduct from Sundry Debtors

Bad DebtBad Debt

If further bad debt to be adjusted :If further bad debt to be adjusted : AddAdd the Bad debt given in the the Bad debt given in the

Adjustment to the Bad debt given Adjustment to the Bad debt given in the trial balance and debit to the in the trial balance and debit to the profit and loss accountprofit and loss account

•DeductDeduct from Sundry Debtors from Sundry Debtors

Provision for bad debts Provision for bad debts

At the end of the year, Any bad debt is At the end of the year, Any bad debt is estimated but not confirmed ,then a estimated but not confirmed ,then a provision for that debt will have to be provision for that debt will have to be created in the books of accounts .created in the books of accounts .

Treatment of Provision for bad Treatment of Provision for bad debtsdebts

Provision for bad debt should be debited in Provision for bad debt should be debited in the profit and loss account the profit and loss account

Should be deducted from Sundry debtors Should be deducted from Sundry debtors in the Balance sheet in the Balance sheet

Writing off Further bad Writing off Further bad debts when a Provision debts when a Provision

is given (OLD) in the is given (OLD) in the trial balancetrial balance

A. A. Existing Provision for doubtful Existing Provision for doubtful debts is less than the total of debts is less than the total of bad debts written off and new bad debts written off and new provision for doubtful debts is provision for doubtful debts is to be shown in the statementsto be shown in the statements. .

1.1.Provision for the doubtful debts given in Provision for the doubtful debts given in the trial balance (cr) Rs1000the trial balance (cr) Rs1000

2.2.Bad debts given the trial balance (Dr.) Bad debts given the trial balance (Dr.) Rs. 600Rs. 600

3. Further bad debts to be written off 3. Further bad debts to be written off ( given in the adjustment ) Rs. 800( given in the adjustment ) Rs. 800

4. Provision for doubtful debts to be 4. Provision for doubtful debts to be provided 5% on debtors provided 5% on debtors

5. Debtors for the year ended Rs. 50,000/- 5. Debtors for the year ended Rs. 50,000/-

B. B. Existing Provision for doubtful Existing Provision for doubtful debts is more than the total of debts is more than the total of bad debts written off and to be bad debts written off and to be written off new provision for written off new provision for doubtful debts is to be shown doubtful debts is to be shown in the statementsin the statements. .

1.1.Provision for the doubtful debts given in Provision for the doubtful debts given in the trial balance (cr) Rs4000the trial balance (cr) Rs4000

2.2.Bad debts given the trial balance (Dr.) Bad debts given the trial balance (Dr.) Rs. 600Rs. 600

3. Further bad debts to be written off 3. Further bad debts to be written off ( given in the adjustment ) Rs. 800( given in the adjustment ) Rs. 800

4. Provision for doubtful debts to be 4. Provision for doubtful debts to be provided 5% on debtors provided 5% on debtors

5. Debtors for the year ended Rs. 50,000/- 5. Debtors for the year ended Rs. 50,000/-

ReserveReserve for discount on for discount on creditorscreditors

The total creditors for the year ended The total creditors for the year ended 31.3.2007- Rs. 450,00031.3.2007- Rs. 450,000

Create a reserve for discount on creditors @ Create a reserve for discount on creditors @ 2% 2%