Financial Statement (With Adjustments - 2)

  • Charity in the form of goods is debited to Profit and Loss account and also reduced from the amount of purchases. Sometimes goods are distributed as free samples for advertising purpose. This will increase the advertising expenses and reduce purchases.
  • Goods taken by proprietor for personal use are called drawings in goods. Capital and purchases both are reduced. It may happen that some part of the goods purchased for re-sale is consumed in the business itself. It is use of goods in business and suitably treated in final accounts.
  • Goods-in-transit implies goods which has been purchased but not received during the current accounting period.
  • Reserve is shown in Profit and Loss account and also shown in the liabilities side of the Balance Sheet. Sometimes, Trial Balance includes ‘Loan Account’ carrying a specified rate of interest. In such a case, it is necessary to calculate the interest, even if nothing is mentioned in the adjustments about the interest. It is called implied interest. But if some amount of interest is shown in the Trial Balance, it should be compared with the full amount of interest and the difference, if any, will be treated as outstanding interest.
  • Implied interest can be receivable or payable.
  • Losses which occur due to some abnormal circumstances such as accident, fire, flood, earthquakes, etc. are called abnormal losses. Such losses can be loss of goods or loss of fixed assets.
  • Sometimes a debtor may also be a creditor for goods purchased by him; this case is known as mutual indebtedness. Such accounts are set off against each other.
  • Royalty outstanding is shown in trading account and liabilities side of the Balance Sheet.
  • When cheque received from debtor is dishonoured, debtors account will be debited, while bank account will be credited.
  • Correction of accounting entries is done like goods sent on approval basis treated as sales, bad debts recovered but included in sundry debtors, assets sold but treated as sales, goods used for domestic purpose wrongly treated as sales, goods sold but not delivered to customer, goods sold and delivered to customer but not recorded in books of accounts etc.

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  • Q1

    At what value are the goods taken for personal use recorded in the books of accounts and why?

    Marks:1
    Answer:

    They are recorded at purchase cost because they are not sale but drawings.

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  • Q2

    At what value are the goods distributed as free samples shown in the books of accounts and why?

    Marks:1
    Answer:

    They are recorded at the purchase cost because it is not a sale, but an advertising expense.

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  • Q3

    What will be the adjusting entry for drawing in goods?

    Marks:1
    Answer:

    Journal Entry

    Particulars

    Dr.

    Cr.

    Drawings A/c…………………Dr.

    To Purchases A/c

    (Goods taken by proprietor for personal use)

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  • Q4

    Give the adjusting entry for goods given as a charity.

    Marks:1
    Answer:

    Journal Entry

    Particulars

    Dr.

    Cr.

    Charity A/c…………………Dr.

    To Purchases A/c

    (Being goods given as charity)

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  • Q5

    What do you understand by goods in transit?

    Marks:1
    Answer:

    It refers to those goods which have been purchased but not received during the current accounting period.

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