Financial Statement (With Adjustments - 1)

  • While preparing Financial Statements, it needs to be ensured that items of income and expenditure which do not pertain to the current accounting period, should not be included.
  • If some of these items have been included in the financial statements these must be excluded by making necessary adjusting entry. Similarly, there can be items which are left out and need to be accounted for.
  • These are called ’adjustments’.Closing stock is the goods lying unsold at the end of current accounting period. It is shown in the Trading account and assets side of the Balance Sheet.
  • Outstanding expenses are expenses which have been incurred during the financial year, but the payment for which has not been made. Such expenses are shown in profit and loss account and liabilities side of the Balance Sheet.
  • Prepaid expenses are the expenses, which have been paid in advance during the current financial year, but the payment is for the next financial year. Such expenses are shown in the assets side of the balance sheet.
  • Accrued income is added to income on credit side of profit and loss account; it is also shown in the assets side of the balance sheet.
  • Sometimes income is received before it becomes actually due. Such income is called ‘unearned income’ or ‘income received in advance’. This income does not relate to the current accounting year.
  • Depreciation is shown in the Profit and Loss account and also deducted from fixed assets in the Balance Sheet.
  • Provision for bad and doubtful debts are shown in the Profit and loss account and deducted from debtors in the balance sheet. Provision made for discount is allowed to debtors for prompt payment.
  • Provision for discount is made on good debtors who are arrived at by deducting further Bad Debts and the provision for Doubtful debts.
  • Other adjustments are closing stock, bad debts, provision for discount on creditors, interest on capital, interest on loan, treatment of deferred revenue expenditure, drawings in goods etc.

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