WHAT IS FINAL ACCOUNT ?

MEANING -

Adjustments means additional information given along with trial balance, which are to be considered while preparing Final Accounts. Every adjustments has minimum two effects. 
Some adjustments are hidden/silent. These adjustments are given in trial balance only. Their effects are two e.g. Salary (11 months), Insurance (paid of up to......), 10% Bank Loan ( taken on......) etc. Some adjustments and their accounting treatment is discussed below :

Final Account all Adjustments and their Effects & Journal Entries :

A) Closing Stock -

Closing stock means stock in trade at the end of the year. At the time of closing all accounts, physical counting of the unsold goods is done and final total of such stock is called closing stock. 
The closing stock may be valued at two prices, market price and cost price. As per principal of conservatism it need to be valued at market price or cost price whichever is less. 
Closing stock given in additional information is recorded to the credit side to Trading Account and it is shown to the Asset side of the Balance Sheet. 

Journal entry -
Stock A/c ____________Dr. 
          To Trading A/c

The effects of entry -
1st effect - Trading Account - Credit side
2nd effect - Balance Sheet - Assets side


B) Outstanding Expenses -

The expenses due but not paid are called outstanding expenses. these expenses may also be unpaid expenses. outstanding expenses are added to the respective expenses amount and shown to the liability side of the balance sheet.

Journal entry -
Particular expenses A/C (wages, rent)_________Dr. 
         To Trading A/c

The effects of entry -
1st effect - Added in particular expenses in Trading Account / Profit and Loss A/c
2nd effect - Balance Sheet - Liability  side


C) Prepaid Expenses -

The expenses which are paid in advanced is called prepaid expenses. such amount of prepaid expenses is deducted from the respective expenses, as they do not relate to the current year, and shown to the assets side of the balance sheet.

Journal entry -
Prepaid Expenses A/C __________Dr. 
         To Particular Expenses A/c (insurance, rent)

The effects of entry -
1st effect - Deducted from that particular expenses in Trading Account or Profit and Loss account 
2nd effect - Balance Sheet - Asset side


D) Pre-received Income -

The income which is not due in the current year but received for the future period is called pre-received incomes which is also called as income received in advance. As it is not related to the current year, it is deducted from the respective incomes and shown to the liability side of the balance sheet. 

Journal entry -
Particular Income A/C (interest, rent)___________Dr. 
          To Income received in advance  A/c
          To Pre-received Income A/C

The effects of entry -
1st effect - Deducted from that particular income in Profit and Loss account 
2nd effect - Balance Sheet - Liability side


E) Outstanding Income -

This is also known as income receivable. The income which is due but not yet received is known as outstanding incomes. Such outstanding incomes is added to the respective incomes as it relates to current year through not received and shown to the asset side of the balance sheet. 

Journal entry -
Outstanding Income A/c___________Dr. 
         To Particular Income A/c (interest)

The effects of entry :
1st effect - Add to that particular income on the credit side of Profit or Loss A/C
2nd effect - Balance Sheet - Assets side


F) Bad Debts -

The debts which are irrecoverable are called Bad Debts. It is the loss of business. If bad debts are given in the trial balance, it is shown to the debit side of the profit and loss account (bad debts given in trial balance should not be deducted from sundry debtors.) additional new bad debts given in adjustment has two effects as, 

Journal entry - 
Bad debts A/c ____________Dr. 
         To Sundry Debtors A/c

The effects of entry -
1st effect - Added to old bad debts in Profit and Loss account 
2nd effect - Deducted from sundry debtors in Balance Sheet


G) Provision for Doubtful Debts (R.D.D) -

It is a provision made for doubtful debts on debtors. This provisions is made for future precaution because debts may become bad. 

Journal entry -
a) R. D. D.  A/c ___________Dr. 
          To Debtors A/c
b) Profit and Loss A/C________ Dr. 
          To Provision for Doubtful Debts A/C

The effects of entry -
1st effect - Added to old bad debt in Profit and Loss A/C
2nd effect - Deducted from Sundry Debtors in Balance Sheet 

Note - 
If R. D. D. Is given in trial balance, then it is old R. D. D. And it is credited to profit and loss account or it is deducted from the total of old bad debts plus new bad debt and new R. D. D. 


H) Reserve for Discount on Debtors and Creditors -

  • a) Reserve for discount on Debtors :
Journal entry -
Reserve for discount on debtors  A/c ___________Dr.          
             To Sundry Debtors A/c

The effects of entry -
1st effect - Deducted from sundry debtors in Balance Sheet. 
2nd effect - Profit and loss account debit side or added in discount allowed in profit and loss account.

  • b) Reserve for discount on Creditors  :
Journal entry -
Sundry creditors A/c ___________Dr. 
         To Reserve for discount on creditors A/c

The effects of entry -
1st effect - Deducted from Sundry creditors in balance sheet. 
2nd effect - Added in Discount received in the credit side of profit and loss account. 


I) Depreciation -

Depreciation is charged on fixed assets. it is a notional loss of the business. therefore, it is debited to profit and loss account. Depreciation reduced the value of asset. therefore it is deducted from asset.

Journal entry -
Depreciation A/c ____________Dr. 
         To Fixed Assets A/c

The effects of entry -
1st effect - show in profit and loss Account - Debit side
2nd effect - Deducted from that particular Assets.


J) Interest on Capital, Drawing and Loan -

  • a) Interest on capital :
Journal entry -
Interest on partners capital A/c ___________Dr. 
         To Partners capital /current A/c

The effects of entry -
1st effect - show in profit and loss  Account - Debit side
2nd effect - Entered in partners capital /current A/C - Credit side

  • b) Interest on Drawings :
Journal entry -
Partners capital /current  A/c _____________Dr. 
         To Interest on partners drawing A/c

The effects of entry -
1st effect - Entered in partners capital /current A/C - Debit side
2nd effect - shown in profit and loss account  - Credit side

  • c) Interest on Loan :
Journal entry -
Interest on loan A/c ____________Dr. 
         To Loan A/c

The effects of entry -
1st effect - Profit and Loss Account - Debit side
2nd effect - Balance Sheet - Liability side or it is added in loan account


K) Interest on investment and loan (given)-

  • a) Interest on investment :
Journal entry -
Interest on investment A/c ___________Dr. 
         To Profit and Loss A/c

The effects of entry -
1st effect - Recorded in Profit and Loss Account - Credit side
2nd effect - Balance Sheet - Assets side

  • b) Interest on Loan (given) :
Journal entry -
Interest on loan receivable A/c ___________Dr. 
         To Profit and Loss A/c

The effects of entry -
1st effect - Profit and Loss Account - Credit side
2nd effect - Balance Sheet - Assets side


L) Goods destroyed by fire /accident (insured) /(uninsured) -

  • a) Goods destroyed by fire and insurance company admitted full claim but the amount of claim is not received :
Journal entry -
Insurance claim A/c ____________Dr. 
         To Trading A/c

The effects of entry -
1st effect - Trading Account - Credit side
2nd effect - Balance Sheet - Assets side

  • b) Goods destroyed by fire and insurance company admitted is part claim :
Journal entry -
1) Insurance claim A/c _______________Dr. 
    Goods destroyed by fire A/C ________Dr. 
         To Trading A/c
2) Profit and Loss A/c _______________Dr. 
         To Goods destroyed by fire A/c

The effects of entry -
1st effect - Trading Account - Credit side - Gross Amount 
2nd effect - Profit and Loss A/C - Debit side - Net Loss by fire
3rd effect - Balance Sheet - Asset Side - Amount of Claim

  • c) Uninsured goods destroyed by fire :
Journal entry -
Profit and Loss A/c _______________Dr. 
         To Trading A/c

The effects of entry -
1st effect - Trading Account - Credit side (goods destroyed by fire)
2nd effect - Profit and Loss A/C - Debit 
side (loss by fire)


M) Goods stolen from Godown/shop -

Goods stolen from Godown or shop is also loss of the business, therefore it is debited to profit and loss account. 

Journal entry -
Loss by theft A/c _____________Dr. 
         To Trading A/c

The effects of entry -
1st effect - Trading Account - Credit side
2nd effect - Profit and Loss A/C - Debit side


N) Goods distributed as a free samples -

When goods are distributed as free samples, it is treated as advertisement of the business, i.e. goods are distributed for advertisement purpose.

Journal entry -
Advertisement A/c _____________Dr. 
         To Trading A/c

The effects of entry -
1st effect - Trading Account - Credit side
2nd effect - Profit and Loss A/C - Debit side or it is added to advertisement if given in the Trial Balance. 


O) Goods withdrawn by partner -

When goods are withdrawal by partner for personal use it is credited to Trading A/C as goods have gone out for the business and debited to partners capital /current account as it is drawing of partner in form of goods. 

Journal entry -
Drawing A/c _____________Dr. 
         To Trading A/c

The effects of entry -
1st effect - Trading Account - Credit side
2nd effect - Partner's capital/ current A/C- Debit side - deduct from capital/current A/C. (additional drawing)


P) Unrecorded purchases and sales -

  • a) Unrecorded Purchases :
When goods are purchase and also included in closing stock but are not recorded in purchase book then it is called as unrecorded purchases. 

Journal entry -
Purchases A/c _____________Dr. 
         To Creditors A/c

The effects of entry -
1st effect - Trading Account - Debit side - Add in purchases
2nd effect - Balance Sheet - Liability side - Add in creditors.

  • b) Unrecorded Sales :
Sometimes goods are sold and delivered to the customers, but no entry is passed in the sales book, such sales are called as unrecorded sales.

Journal entry -
Debtors A/c _______________Dr. 
         To Sales A/c

The effects of entry -
1st effect - Added to sales in Trading Account
2nd effect - Added to Debtors in Balance Sheet Assets side


Q) Capital expenditure included in revenue expenses and vice-versa -

Journal entry -
Asset A/c _____________Dr. 
         To Expenses A/c

The effects of entry -
1st effect - Add to particular asset in balance sheet 
2nd effect - Deduct from particular expenses in trading account or profit and loss account. 

     If the revenue expenses wrongly included in value of asset then it should be deducted from that asset and added to the particular expenses. 

Journal entry -
Expenses A/c _____________Dr. 
         To Asset A/c

The effects of entry -
1st effect - Deduct from particular asset in balance sheet
2nd effect - Add to that particular expenses in trading account or profit and loss account. 


R) Bills receivable Dishonored -

When debtors does not pay the amount of bill on due date, the bill is said to have been dishonored. When bill is dishonored it is deducted from bills receivable and added to the list of debtors. 

Journal entry -
Debtors A/c _______________Dr. 
         To Bills receivable A/c

The effects of entry -
1st effect - Deduct from bills receivable in balance sheet. 
2nd effect - Added in sundry debtors in Balance Sheet.


S) Bills Payable Dishonored -

Whenever businessman accept the bill of exchange, he is liable to pay the amount of bill to his creditors. But if his fails to pay the amount of bill on due date the the bill is said to be dishonored. 

Journal entry -
Bills Payable A/c _____________Dr. 
         To Creditors A/c

The effects of entry -
1st effect - Deduct from Bills payable in balance sheet. 
2nd effect - Added in sundry creditors in Balance Sheet.


T) Deffered Expenses -

Expenses paid in one year but whose benefit is availed for more than two years are called as Deffered Expenses. these expenses are spread over the number of years. Proportionate expenses related to current year are charged to profit and loss account and remaining expenses are shown to the assets side of the balance sheet like prepaid expenses.

Journal entry -
Profit and Loss A/c ____________Dr. 
         To Differed Expenses A/c

The effects of entry -
1st effect - Profit and Loss Account - Debit side - Proportionate amount.
2nd effect - Balance Sheet - Assets side - Remaining Amount. 


U) Capital Receipts included in Revenue Receipts & vice-versa -

If capital receipts is wrongly included in revenue receipts, then it is deducted from revenue receipts. 
E.g. Sales include sale of machinery, the entry will be :

Journal entry -
Sales A/c ____________Dr. 
         To Machinery A/c

The effects of entry -
1st effect - Deducted from Sales in Trading Account
2nd effect - Deducted from Machinery in Balance Sheet 

If revenue receipts wrongly included in capital receipts, then it is deducted from capital receipts.
E.g. Interest received on investment wrongly included in the sale of furniture, the entry will be :

Journal entry -
Furniture A/c _______________Dr. 
         To Interest Received A/c

The effects of entry -
1st effect - Profit and Loss Account - Credit side
2nd effect - Balance Sheet - Assets side - Added in Furniture 

V) Commission to Partner as percentage of Gross Profit /Sales -

When Commission is allowed to any partner as percentage of gross profit or sales, it is an expenditure of a business and therefore debited to the profit and loss account and credited to partners capital or current account as it is income of partner.

Journal entry -
Commission to Partners A/c ___________Dr. 
         To Partners Capital /Current A/c

The effects of entry -
1st effect - Profit and Loss Account - Debit side
2nd effect - Partner's Capital /Current A/C - Credit side or added in Partners Capital / Current Account.