CBSE Class 11 Accountancy Revision Notes Chapter 9 Financial Statements 2 2026–27

Financial Statements 2 explains how adjustments are recorded before preparing final accounts. In CBSE Class 11 Accountancy Chapter 9, students learn the dual effect of adjustments in the trading and profit and loss account and balance sheet.

Financial Statements 2 begins after students understand the basic format of final accounts. A trial balance gives account balances, but some incomes, expenses, losses and asset values still need adjustment before the business can calculate correct profit and financial position.

These CBSE class 11 accountancy revision notes chapter 9 show how each adjustment changes two places in final accounts. Closing stock, outstanding expenses, prepaid expenses, accrued income, income received in advance, depreciation, bad debts and provisions all affect both profit calculation and balance sheet presentation.

Key Takeaways

  • Adjustments: They bring pending, prepaid, accrued or estimated items into final accounts.
  • Dual effect: Every adjustment appears in two places.
  • Profit calculation: Adjustments help calculate gross profit, net profit or net loss correctly.
  • Balance sheet: Adjusted assets and liabilities show the financial position of the business.

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Financial Statements 2 Class 11 Accountancy Notes: Chapter Overview

Financial Statements 2 Class 11 Accountancy Notes explain how final accounts are prepared when extra information is given after the trial balance. These adjustments help match incomes and expenses with the correct accounting year.

Class 11 Accountancy Chapter 9 Notes focus on the treatment of adjustments in the trading and profit and loss account and the balance sheet. The chapter also explains how the same item changes profit on one side and asset or liability value on the other side.

Topic What Students Learn
Financial statements Final accounts prepared from trial balance and adjustments
Need for adjustments Why some items need correction before final accounts
Closing stock Treatment in trading account and balance sheet
Outstanding expenses Expense due but yet to be paid
Prepaid expenses Expense paid in advance
Accrued income Income earned but yet to be received
Income received in advance Income received before it is earned
Depreciation Reduction in asset value
Bad debts Amount unrecoverable from debtors
Provision for doubtful debts Expected loss from debtors
Provision for discount on debtors Expected discount allowed to good debtors
Manager’s commission Commission payable to manager
Interest on capital Interest allowed on proprietor’s capital

CBSE Class 11 Accountancy Chapter 9 revision notes infographic showing trading and profit statements with financial charts.

What Are Financial Statements?

Financial statements are statements prepared at the end of an accounting period to show business performance and financial position.

In this chapter, financial statements mainly include the trading and profit and loss account and the balance sheet. The trading and profit and loss account shows profit or loss. The balance sheet shows assets, liabilities and capital on a particular date.

Financial Statement Purpose
Trading Account Calculates gross profit or gross loss
Profit and Loss Account Calculates net profit or net loss
Balance Sheet Shows assets, liabilities and capital
Final Accounts Combined term for trading account, profit and loss account and balance sheet

Need for Adjustments

Need for adjustments arises because final accounts follow the accrual basis of accounting. Revenue is recorded when it is earned, and expenses are recorded when they are incurred.

A business may have paid an expense in advance, left an expense unpaid, earned income that is yet to be received or received income for a later period. Adjustments bring such items into the correct accounting year.

Situation Why Adjustment Is Needed
Expense due but unpaid It belongs to the current year
Expense paid in advance It belongs to a future year
Income earned but unpaid It belongs to the current year
Income received in advance It belongs to a future year
Depreciation Asset value has reduced during the year
Bad debts Some debtors have become unrecoverable

Adjustments in Final Accounts

Adjustments in final accounts are additional items given after the trial balance. They are recorded in two places because every accounting entry has a dual effect.

Adjustment First Effect Second Effect
Closing stock Credit side of Trading Account Asset side of Balance Sheet
Outstanding expenses Added to expense Liability side of Balance Sheet
Prepaid expenses Deducted from expense Asset side of Balance Sheet
Accrued income Added to income Asset side of Balance Sheet
Income received in advance Deducted from income Liability side of Balance Sheet
Depreciation Debit side of Profit and Loss Account Deducted from asset
Bad debts Debit side of Profit and Loss Account Deducted from debtors
Provision for doubtful debts Debit side of Profit and Loss Account Deducted from debtors
Manager’s commission Debit side of Profit and Loss Account Liability side of Balance Sheet
Interest on capital Debit side of Profit and Loss Account Added to capital

Closing Stock

Closing stock is the value of unsold goods at the end of the accounting period. It is shown on the credit side of the trading account and also on the asset side of the balance sheet.

Adjustment Entry

Particulars Debit Credit
Closing Stock A/c Dr.
To Trading A/c

 

Treatment Place
Credit side Trading Account
Asset side Balance Sheet

Closing stock reduces the cost of goods sold and becomes the opening stock of the next accounting year.

Outstanding Expenses

Outstanding expenses are expenses that belong to the current accounting year but remain unpaid at the end of the year.

For example, if salary for March is due but paid in April, it is treated as outstanding salary for the current year.

Adjustment Entry

Particulars Debit Credit
Concerned Expense A/c Dr.
To Outstanding Expense A/c

 

Treatment Place
Add to related expense Trading Account or Profit and Loss Account
Show as liability Balance Sheet

Outstanding expenses increase the current year’s expense and reduce profit.

Prepaid Expenses

Prepaid expenses are expenses paid in advance. Their benefit belongs to the next accounting period.

For example, insurance paid for 12 months may include a few months of the next year. That future portion is treated as prepaid insurance.

Adjustment Entry

Particulars Debit Credit
Prepaid Expense A/c Dr.
To Concerned Expense A/c

 

Treatment Place
Deduct from related expense Trading Account or Profit and Loss Account
Show as asset Balance Sheet

Prepaid expenses reduce the current year’s expense and increase profit.

Accrued Income

Accrued income is income earned during the current year but yet to be received.

For example, interest on investment may be earned by the business, even when the amount is received later.

Adjustment Entry

Particulars Debit Credit
Accrued Income A/c Dr.
To Concerned Income A/c

 

Treatment Place
Add to related income Profit and Loss Account
Show as asset Balance Sheet

Accrued income increases current year income and also creates an asset.

Income Received in Advance

Income received in advance is income received during the current year for a service or period that belongs to the next year.

For example, rent received for April, May and June before the current year ends is treated as rent received in advance.

Adjustment Entry

Particulars Debit Credit
Concerned Income A/c Dr.
To Income Received in Advance A/c

 

Treatment Place
Deduct from related income Profit and Loss Account
Show as liability Balance Sheet

Income received in advance reduces current year income and creates a liability.

Depreciation in Final Accounts

Depreciation is the decrease in the value of a fixed asset due to use, passage of time or obsolescence. It is treated as an expense.

Adjustment Entry

Particulars Debit Credit
Depreciation A/c Dr.
To Asset A/c

 

Treatment Place
Debit side Profit and Loss Account
Deduct from asset Balance Sheet

Depreciation reduces profit and also reduces the book value of the asset.

Bad Debts

Bad debts are amounts that cannot be recovered from debtors. They are treated as a loss for the business.

Adjustment Entry

Particulars Debit Credit
Bad Debts A/c Dr.
To Debtors A/c

 

Treatment Place
Debit side Profit and Loss Account
Deduct from debtors Balance Sheet

Bad debts reduce profit and also reduce the amount recoverable from debtors.

Provision for Doubtful Debts

Provision for doubtful debts is created for an expected loss from debtors. It is based on the idea that some debtors may fail to pay in the future.

Adjustment Entry

Particulars Debit Credit
Profit and Loss A/c Dr.
To Provision for Doubtful Debts A/c

 

Treatment Place
Debit side Profit and Loss Account
Deduct from debtors Balance Sheet

Provision for doubtful debts is calculated after deducting further bad debts from debtors.

Provision for Discount on Debtors

Provision for discount on debtors is created when a business expects to allow discount to debtors for prompt payment.

This provision is calculated on good debtors. Good debtors are found after deducting further bad debts and provision for doubtful debts.

Adjustment Entry

Particulars Debit Credit
Profit and Loss A/c Dr.
To Provision for Discount on Debtors A/c

 

Treatment Place
Debit side Profit and Loss Account
Deduct from debtors Balance Sheet

Order of Deduction from Debtors

Debtors are adjusted in a fixed order while preparing the balance sheet.

Step Adjustment
Step 1 Start with debtors from trial balance
Step 2 Deduct further bad debts
Step 3 Deduct provision for doubtful debts
Step 4 Deduct provision for discount on debtors

Example

Debtors = ₹50,000
Further bad debts = ₹2,000
Provision for doubtful debts = 5%
Provision for discount on debtors = 2%

Particulars Amount
Debtors ₹50,000
Less: Further Bad Debts ₹2,000
Good Debtors before Provision ₹48,000
Less: Provision for Doubtful Debts @5% ₹2,400
Debtors after Doubtful Debt Provision ₹45,600
Less: Provision for Discount on Debtors @2% ₹912
Debtors shown in Balance Sheet ₹44,688

Manager’s Commission

Manager’s commission is commission payable to the manager based on profit. It is treated as an expense for the business.

The commission may be calculated before charging commission or after charging commission.

Commission Before Charging Commission

Commission = Net Profit before Commission × Rate / 100

Commission After Charging Commission

Commission = Net Profit before Commission × Rate / (100 + Rate)

Adjustment Entry

Particulars Debit Credit
Profit and Loss A/c Dr.
To Manager’s Commission A/c

 

Treatment Place
Debit side Profit and Loss Account
Liability side Balance Sheet

Interest on Capital

Interest on capital is interest allowed on the proprietor’s capital. It is treated as an expense for the business and added to capital.

Adjustment Entry

Particulars Debit Credit
Interest on Capital A/c Dr.
To Capital A/c

 

Treatment Place
Debit side Profit and Loss Account
Added to capital Balance Sheet

Interest on capital reduces net profit but increases the proprietor’s capital balance.

Trading and Profit and Loss Account

The trading and profit and loss account is prepared to calculate gross profit, gross loss, net profit or net loss.

Trading Account records direct items related to goods. Profit and Loss Account records indirect expenses and incomes.

Trading Account Items Profit and Loss Account Items
Opening stock Salaries
Purchases Rent
Purchases return Commission
Sales Discount
Sales return Depreciation
Wages Bad debts
Carriage inwards Provision for doubtful debts
Closing stock Manager’s commission

Gross Profit and Gross Loss

Gross profit is the excess of net sales over the cost of goods sold.

Gross Profit = Net Sales - Cost of Goods Sold

Cost of Goods Sold = Opening Stock + Net Purchases + Direct Expenses - Closing Stock

Gross loss occurs when cost of goods sold is higher than net sales.

Term Meaning
Net Sales Sales minus sales return
Net Purchases Purchases minus purchases return
Direct Expenses Expenses directly linked with goods
Gross Profit Net sales exceed cost of goods sold
Gross Loss Cost of goods sold exceeds net sales

Net Profit and Net Loss

Net profit is calculated after adding incomes and deducting indirect expenses from gross profit.

Net Profit = Gross Profit + Other Incomes - Indirect Expenses

Net loss occurs when indirect expenses and losses exceed gross profit and other incomes.

Item Treatment
Gross profit Credit side of Profit and Loss Account
Other incomes Credit side of Profit and Loss Account
Indirect expenses Debit side of Profit and Loss Account
Net profit Transferred to capital account
Net loss Deducted from capital account

Balance Sheet

A balance sheet shows the financial position of a business on a particular date. It includes assets, liabilities and capital.

The balance sheet is prepared after the trading and profit and loss account. Net profit is added to capital, and net loss is deducted from capital.

Liabilities Side Assets Side
Capital Fixed assets
Add: Net profit Current assets
Less: Drawings Debtors
Loans Cash
Creditors Bank
Outstanding expenses Closing stock
Income received in advance Prepaid expenses
Manager’s commission outstanding Accrued income

Financial Statements 2 Class 11 Accountancy Chapter 9 CBSE Notes: Adjustment Summary

Financial Statements 2 Class 11 Accountancy Chapter 9 CBSE Notes become easier when students remember the dual effect of each adjustment.

Adjustment Profit and Loss/Trading Account Balance Sheet
Closing stock Credit Trading Account Asset
Outstanding expenses Add to expense Liability
Prepaid expenses Deduct from expense Asset
Accrued income Add to income Asset
Income received in advance Deduct from income Liability
Depreciation Expense Deduct from asset
Bad debts Expense Deduct from debtors
Provision for doubtful debts Expense Deduct from debtors
Provision for discount on debtors Expense Deduct from debtors
Manager’s commission Expense Liability
Interest on capital Expense Added to capital

Common Mistakes in Adjustments

Students often lose marks when they record only one effect of an adjustment. Each adjustment must appear in two places.

Mistake Correct Approach
Closing stock shown only in Trading Account Show it also as an asset
Outstanding expense added to expense only Show it also as liability
Prepaid expense left inside full expense Deduct it and show as asset
Accrued income added to income only Show it also as asset
Depreciation recorded in Profit and Loss Account only Deduct it from asset
Provision for doubtful debts calculated before bad debts Deduct further bad debts first

CBSE Class 11 Accountancy Chapter 9 Financial Statements 2: Quick Revision Tables

Adjustment Entry Table

Adjustment Journal Entry
Closing stock Closing Stock A/c Dr. To Trading A/c
Outstanding expenses Expense A/c Dr. To Outstanding Expense A/c
Prepaid expenses Prepaid Expense A/c Dr. To Expense A/c
Accrued income Accrued Income A/c Dr. To Income A/c
Income received in advance Income A/c Dr. To Income Received in Advance A/c
Depreciation Depreciation A/c Dr. To Asset A/c
Bad debts Bad Debts A/c Dr. To Debtors A/c
Provision for doubtful debts Profit and Loss A/c Dr. To Provision for Doubtful Debts A/c
Provision for discount on debtors Profit and Loss A/c Dr. To Provision for Discount on Debtors A/c
Manager’s commission Profit and Loss A/c Dr. To Manager’s Commission A/c
Interest on capital Interest on Capital A/c Dr. To Capital A/c

Final Accounts Flow

Stage Purpose
Trial Balance Gives account balances
Adjustments Corrects pending and accrued items
Trading Account Calculates gross profit or gross loss
Profit and Loss Account Calculates net profit or net loss
Balance Sheet Shows financial position

Key Terms from CBSE Class 11 Accountancy Revision Notes Chapter 9

Key Term Meaning
Financial Statements Statements showing performance and financial position
Final Accounts Trading Account, Profit and Loss Account and Balance Sheet
Adjustments Items recorded before final accounts are completed
Closing Stock Unsold goods at the end of the accounting year
Outstanding Expenses Expenses due but yet to be paid
Prepaid Expenses Expenses paid in advance
Accrued Income Income earned but yet to be received
Income Received in Advance Income received before it is earned
Depreciation Fall in fixed asset value
Bad Debts Amount unrecoverable from debtors
Provision for Doubtful Debts Estimated loss from debtors
Provision for Discount on Debtors Expected discount allowed to good debtors
Manager’s Commission Commission payable to manager
Interest on Capital Interest allowed on proprietor’s capital
Trading Account Account used to calculate gross profit or gross loss
Profit and Loss Account Account used to calculate net profit or net loss
Balance Sheet Statement showing assets, liabilities and capital

Useful Links for Class 11 Accountancy Revision Notes

Section Useful Links
Revision Notes CBSE Class 11 Accountancy Revision Notes
Accountancy Notes CBSE Class 11 Accountancy Revision Notes Chapter 1
Accountancy Notes CBSE Class 11 Accountancy Revision Notes Chapter 2
NCERT Solutions NCERT Solutions Class 11 Accountancy
Sample Papers CBSE Sample Papers for Class 11 Accountancy
Important Questions Important Questions Class 11 Accountancy
NCERT Solutions NCERT Solutions for Class 11
Important Questions CBSE Important Questions
Syllabus CBSE Class 11 Accountancy Syllabus
NCERT Books NCERT Books for Class 11 Accountancy
Commerce Support CBSE Class 11 Business Studies Revision Notes

FAQs (Frequently Asked Questions)

Adjustments are needed because some incomes and expenses belong to the current year even when cash is paid or received in another year. They help final accounts show correct profit and financial position.

Dual effect means every adjustment appears in two places. For example, outstanding salary is added to salary in the Profit and Loss Account and shown as a liability in the Balance Sheet.

Closing stock is shown on the credit side of the Trading Account and on the asset side of the Balance Sheet. It reduces cost of goods sold and becomes opening stock for the next year.

Outstanding expenses are due but unpaid, so they are added to expenses and shown as liabilities. Prepaid expenses are paid in advance, so they are deducted from expenses and shown as assets.

Bad debts are shown as an expense in the Profit and Loss Account and deducted from debtors in the Balance Sheet. They reduce both profit and the amount recoverable from debtors.

Provision for doubtful debts is usually calculated on debtors after deducting further bad debts. It is shown as an expense and deducted from debtors in the Balance Sheet.

Manager’s commission is shown on the debit side of the Profit and Loss Account. If unpaid, it is also shown as a liability in the Balance Sheet.