Common adjustments in balance sheet, Accounting Basics

COMMON ADJUSTMENTS AFFECTING THE PREPARATION OF BALANCE SHEET ARE:

1. Closing stock :  Closing stock come into view on the credit side of trading account and assets side of  balance sheet if it is agreed in the adjustments. If it is given in the trial balance it will show only on the assets side of the balance sheet. The entry passed is

Closing Stock A/c Dr.

To Trading Account.

2. Income received in advance:  Income expected in reverence of which service has not been rendered is identified as incomes received in proceed. In sort to calculate the precise loss or profit made through the year, such income should not be in use to account while preparing loss and profit account.  Therefore this amount must be subtracted from the personal income account in the loss and profit account and must be treated as a charge in the balance sheet.  The alteration entry is

Income account Dr.

To income received in advance.

3. Outstanding expenses : Outstanding expenses pass on to those expenses which have become unpaid during the accounting phase for which financial statements are being prepared, but not yet have been paid.   Such type of expenses if given in the adjustments should be added to the particular expenditure account on the debit side of loss and profit account and must be exposed as liabilities in the balance sheet.  If such operating costs are given in the trial balance, they should be traced only on the legal responsibility side of the balance sheet. The journal entry to be approved is

Respective Expenditure A/c Dr.

To Outstanding Expenditure

4. Pre-paid expenses :   They are those operating cost which have been paid in go forward. They are also identified as un-expired expenses.  If given in alteration, they should be subtracted from the particular expenses account on the debit side of the loss and profit account and must be revealed on the asset side of the balance sheet.  If specified in the trial balance, they must be exposed only on the asset side of the balance sheet.  The alteration entry is

Pre-paid expenditure A/c Dr.

To Respective Expenditure

5. Depreciation:  It is a decrease in the value of the benefit due to wear and tear, lapse of time, obsolescence and accident.  It is charged on fixed assets of the business.  If known in the adjustments, it must be revealed on the debit side of the loss and profit account and must be abstracted from the respective asset account in the balance sheet. If given in the trial balance, it must be revealed only on the debit side of the loss and profit account.  The entry is

Depreciation A/c Dr.

To Respective Fixed Asset

6. Outstanding or accrued income: This is the earnings which has been received during the current accounting year and has become due but not yet received by the firm.If given in the correction, it have to be added to the personal income account on the credit side of the loss and profit account and must be shown on the assets part of the balance sheet. But if identified in the trial balance, it have to be shown only on the asset side of the balance sheet. The entry is

Outstanding/Accrued Income A/c Dr.

To Respective Income

7. Provision for bad debts : This stand for a provision made by the business for any possible bad debts. It is charged to the loss and profit account debit side and have to be subtracted from the debtors after deducting the bad debts if any on the asset side of the balance sheet, if specified in the adjustments.  If specified in the trial balance, it must be calculated merely in preparing the loss and profit account. The entry is

Loss and profit A/c Dr.

8. Bad Debts:  They stand for that part of credit sales (debtors) that had become bad suitable to the inability of the debtor to refund the amount.  It is a loss to the business and expand to the debtor. This is a actual loss to the business and as such have to be deducted from the debtors earlier than deducting any coffers created on debtors.  If given in the adjustments it have to be shown on the debit side of the loss and profit account and must be subtracted from the debtors account on the asset side of the balance sheet.  If specified in the trial balance this amount must be revealed only in the loss and profit account.  The entry is

Bad debts A/c Dr.

To Debtor's personal account

To Provision for bad debts

9. Provision for doubtful debts: This stand for a condition made by the business for any probable doubtful debts. If agreed in the adjustments,  it have to be charged to the loss and profit account debit side and must be subtracted from the debtors later than deducting the bad debts (if any) and reserve for bad debts on the benefit side of the balance sheet. If set in the trial balance, it must be careful only in preparing the loss and profit account.  The entry is

Loss and profit A/c Dr.

To Provision for doubtful debts

10.  Interest on capital:  This is the revisit; the owners of the business will get for investing in the business.  Typically it is paid or added to the resources at a fixed percentage. If agreed in the adjustments, it is revealed on the debit side of the loss and profit account and is frequently added to the capital account on the responsibility side of the balance sheet.  If agreed in the trial balance, it has to be revealed on the debit side of loss and profit account. The entries are:

Loss and profit A/c

To Interest on capital

Interest on capital A/c Dr

To capital A/c

11.  Provision for doubtful debts: This stand for a condition made by the business for any possible discount to be allowed to the debtors. If agreed in the adjustments, it have to be charged to the loss and profit account debit side and must be abstract from the debtors after deducting the bad debts (if any), preserve for bad debts (if any) and set aside for doubtful debts (if any) on the asset side of the balance sheet. If agreed in the trial balance, it must be measured only in preparing the loss and profit account. The entry is

Loss and profit A/c Dr.

To Provision for discount for debtors

12.  Reserve for discount on creditors: This stand for a provision made by the business for any potential discount to be allowable by the creditors of the business. If agreed in the adjustments, it has to be charged to the loss and profit account credit side and must be deducted from the creditors on the responsibilities side of the balance sheet. If specified in the trial balance, it has to be considered only in arranging the loss and profit account. The entry is

Reserve for discount on creditors A/c Dr

To Loss and profit A/c

13.  Interest on Drawings:  Drawing stand for the withdrawals made by the proprietors during the accounting period either in the form of stock, cash or withdrawal from bank for personal use.  They must be subtracted from the capital account on the responsibilities side of the balance sheet. On occasion, firms charge interest on such drawings completed by the owners to discourage them from retreating their investment.  Typically it is levied at a fixed percentage.  It is an income to the business and a loss to the owner.  Therefore, if given in the adjustments, it has to be shown on the credit side of the loss and profit account and deducted from the assets in the balance sheet. If given in the trial balance, it has to be shown only in the loss and profit account. The relevant entries are:

Interest on Drawings A/c Dr

To Profit and loss A/c

Interest on Drawings A/c Dr

To capital A/c

Posted Date: 10/15/2012 5:41:43 AM | Location : United States







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