NCERT Textbook - Financial Statements - II | Accountancy Class 11 - Commerce PDF Download

 Page 1


318 Accountancy
Financial Statements - II 9
I
n chapter 8, you learnt about the preparation of
simple ??nal accounts in the format of trading 
and pro??t and loss account and balance sheet. The 
preparation of simple ??nal accounts pre-supposes 
the absence of any accounting complexities 
which are normal to business operations. These 
complexities arise due to the fact that the process of 
determining income and ??nancial position is based 
on the accrual basis of accounting. This emphasises 
that while ascertaining the pro??tability, the revenues 
be considered on earned basis and not on receipt 
basis, and the expenses be considered on incurred 
basis and not on paid basis. Hence, many items 
need some adjustment while preparing the ??nancial 
statements. In this chapter we shall discuss all items 
which require adjustments and the way these are 
brought into the books of account and incorporated 
in the ??nal accounts.
9.1 Need for Adjustments
According to accrual concept of accounting, the 
pro??t or loss for an accounting year is not based 
on the revenues realised in cash and the expenses 
paid in cash during that year. There may exist some 
receipts and expenses in the current year which 
partially relate to the previous year or to the next 
year. Also, there may exist incomes and expenses 
relating to the current year that still need to be 
brought into books of account. Such items duly 
adjusted, the ??nal accounts will not re??ect the true 
and fair view of the state of affairs of the business.
LearNiNg o bjectives After studying this chapter, 
you will be able to :
• describe 	 the 	 need 	 for
adjustments while
preparing 	 the 	 ??nancial
statements;
• explain 	 the	 accounting
treatment of adj ust ­ ments for outstanding
and 	 prepaid 	 expenses,
accrued and advance
receipts of incomes;
• d iscuss 	 th e 	 ad just 	 -	
ments to be made re­ garding depreci a ­ tion, 
bad debts, provi sion
for doubtful debts, pro­ vision for discount on
debtors;
• explain 	 the 	 concepts
and adjustment of
m anager ’ s com m i ss i on 
and interest on capital;
• pr epar e 	 pr o??t 	 and	 l oss
account and balance
sheet with adjust­ 
m ents.
Ch-09.indd   318 9/13/2022   5:00:26 PM
Reprint 2025-26
Page 2


318 Accountancy
Financial Statements - II 9
I
n chapter 8, you learnt about the preparation of
simple ??nal accounts in the format of trading 
and pro??t and loss account and balance sheet. The 
preparation of simple ??nal accounts pre-supposes 
the absence of any accounting complexities 
which are normal to business operations. These 
complexities arise due to the fact that the process of 
determining income and ??nancial position is based 
on the accrual basis of accounting. This emphasises 
that while ascertaining the pro??tability, the revenues 
be considered on earned basis and not on receipt 
basis, and the expenses be considered on incurred 
basis and not on paid basis. Hence, many items 
need some adjustment while preparing the ??nancial 
statements. In this chapter we shall discuss all items 
which require adjustments and the way these are 
brought into the books of account and incorporated 
in the ??nal accounts.
9.1 Need for Adjustments
According to accrual concept of accounting, the 
pro??t or loss for an accounting year is not based 
on the revenues realised in cash and the expenses 
paid in cash during that year. There may exist some 
receipts and expenses in the current year which 
partially relate to the previous year or to the next 
year. Also, there may exist incomes and expenses 
relating to the current year that still need to be 
brought into books of account. Such items duly 
adjusted, the ??nal accounts will not re??ect the true 
and fair view of the state of affairs of the business.
LearNiNg o bjectives After studying this chapter, 
you will be able to :
• describe 	 the 	 need 	 for
adjustments while
preparing 	 the 	 ??nancial
statements;
• explain 	 the	 accounting
treatment of adj ust ­ ments for outstanding
and 	 prepaid 	 expenses,
accrued and advance
receipts of incomes;
• d iscuss 	 th e 	 ad just 	 -	
ments to be made re­ garding depreci a ­ tion, 
bad debts, provi sion
for doubtful debts, pro­ vision for discount on
debtors;
• explain 	 the 	 concepts
and adjustment of
m anager ’ s com m i ss i on 
and interest on capital;
• pr epar e 	 pr o??t 	 and	 l oss
account and balance
sheet with adjust­ 
m ents.
Ch-09.indd   318 9/13/2022   5:00:26 PM
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319 Financial Statements - II
For example, an amount of ` 1,200 paid on July 01, 2016 towards insurance 
premium. Any general insurance premium paid usually covers a period of 12 
months. Suppose the accounting year ends on March 31,
 
2017, it would mean 
that one fourth of the insurance premium is paid on July 01, 2016 relate to 
the next accounting year 2017-18. Therefore, while preparing the ??nancial 
statements for 2016-17, the expense on insurance premium that should be 
debited to the pro??t and loss account is ` 900 (` 1,200 – ` 300).
Let us take another example. The salaries for the month of March, 2017 were 
paid on April 07, 2017. This means that the salaries account of 2016-17 does 
not include the salaries for the month of March 2017. Such unpaid salaries is 
termed as salaries outstanding which have to be brought into books of account 
and is debited to pro??t and loss account along with the salaries already paid 
for the month of April, 2016 up to Feburary, 2017.
Similarly, adjustments may also become necessary in respect of certain 
incomes received in advance or those which have accrued but are still to be 
received. Apart from these, there are certain items which are not recorded on 
day-to-day basis such as depreciation on ??xed assets, interest on capital, etc. 
These are adjusted at the time of preparing ??nancial statements. The purpose 
of making various adjustments is to ensure that the ??nal accounts reveal the 
true pro??t or loss and the true ??nancial position of the business. The items 
which usually need adjustments are:
 1. Closing stock
 2. Outstanding/expenses
 3. Prepaid/Unexpired expenses
 4. Accrued income
 5. Income received in advance
 6. Depreciation
 7. Bad debts
 8. Provision for doubtful debts
 9. Provision for discount on debtors
 10. Manager’s commission   
 11. Interest on capital
It may be noted that when we prepare the ??nancial statements, we are 
provided with the trial balance and some other additional information in 
respect of the adjustments to be made. All adjustments are re??ected in the 
??nal accounts at two places to complete the double entry. Our earlier example 
in chapter 8 (Page no. 294) which represents the trial balance of Ankit is 
reproduced in ??gure 9.1:
Ch-09.indd   319 9/13/2022   5:00:26 PM
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Page 3


318 Accountancy
Financial Statements - II 9
I
n chapter 8, you learnt about the preparation of
simple ??nal accounts in the format of trading 
and pro??t and loss account and balance sheet. The 
preparation of simple ??nal accounts pre-supposes 
the absence of any accounting complexities 
which are normal to business operations. These 
complexities arise due to the fact that the process of 
determining income and ??nancial position is based 
on the accrual basis of accounting. This emphasises 
that while ascertaining the pro??tability, the revenues 
be considered on earned basis and not on receipt 
basis, and the expenses be considered on incurred 
basis and not on paid basis. Hence, many items 
need some adjustment while preparing the ??nancial 
statements. In this chapter we shall discuss all items 
which require adjustments and the way these are 
brought into the books of account and incorporated 
in the ??nal accounts.
9.1 Need for Adjustments
According to accrual concept of accounting, the 
pro??t or loss for an accounting year is not based 
on the revenues realised in cash and the expenses 
paid in cash during that year. There may exist some 
receipts and expenses in the current year which 
partially relate to the previous year or to the next 
year. Also, there may exist incomes and expenses 
relating to the current year that still need to be 
brought into books of account. Such items duly 
adjusted, the ??nal accounts will not re??ect the true 
and fair view of the state of affairs of the business.
LearNiNg o bjectives After studying this chapter, 
you will be able to :
• describe 	 the 	 need 	 for
adjustments while
preparing 	 the 	 ??nancial
statements;
• explain 	 the	 accounting
treatment of adj ust ­ ments for outstanding
and 	 prepaid 	 expenses,
accrued and advance
receipts of incomes;
• d iscuss 	 th e 	 ad just 	 -	
ments to be made re­ garding depreci a ­ tion, 
bad debts, provi sion
for doubtful debts, pro­ vision for discount on
debtors;
• explain 	 the 	 concepts
and adjustment of
m anager ’ s com m i ss i on 
and interest on capital;
• pr epar e 	 pr o??t 	 and	 l oss
account and balance
sheet with adjust­ 
m ents.
Ch-09.indd   318 9/13/2022   5:00:26 PM
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319 Financial Statements - II
For example, an amount of ` 1,200 paid on July 01, 2016 towards insurance 
premium. Any general insurance premium paid usually covers a period of 12 
months. Suppose the accounting year ends on March 31,
 
2017, it would mean 
that one fourth of the insurance premium is paid on July 01, 2016 relate to 
the next accounting year 2017-18. Therefore, while preparing the ??nancial 
statements for 2016-17, the expense on insurance premium that should be 
debited to the pro??t and loss account is ` 900 (` 1,200 – ` 300).
Let us take another example. The salaries for the month of March, 2017 were 
paid on April 07, 2017. This means that the salaries account of 2016-17 does 
not include the salaries for the month of March 2017. Such unpaid salaries is 
termed as salaries outstanding which have to be brought into books of account 
and is debited to pro??t and loss account along with the salaries already paid 
for the month of April, 2016 up to Feburary, 2017.
Similarly, adjustments may also become necessary in respect of certain 
incomes received in advance or those which have accrued but are still to be 
received. Apart from these, there are certain items which are not recorded on 
day-to-day basis such as depreciation on ??xed assets, interest on capital, etc. 
These are adjusted at the time of preparing ??nancial statements. The purpose 
of making various adjustments is to ensure that the ??nal accounts reveal the 
true pro??t or loss and the true ??nancial position of the business. The items 
which usually need adjustments are:
 1. Closing stock
 2. Outstanding/expenses
 3. Prepaid/Unexpired expenses
 4. Accrued income
 5. Income received in advance
 6. Depreciation
 7. Bad debts
 8. Provision for doubtful debts
 9. Provision for discount on debtors
 10. Manager’s commission   
 11. Interest on capital
It may be noted that when we prepare the ??nancial statements, we are 
provided with the trial balance and some other additional information in 
respect of the adjustments to be made. All adjustments are re??ected in the 
??nal accounts at two places to complete the double entry. Our earlier example 
in chapter 8 (Page no. 294) which represents the trial balance of Ankit is 
reproduced in ??gure 9.1:
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320 Accountancy
Trial Balance of Ankit as on March 31, 2017
 Account Title  Elements L.F. Debit Credit
    Amount Amount
    ` `
 Cash   Assets   1,000   
 Bank    Assets   5,000  
 Wages   Expense   8,000  
 Salaries   Expense   25,000  
 Furniture   Assets   15,000   Rent of building   Expense   13,000  
 Debtors   Assets   15,500  
 Bad debts   Expense   4,500  
 Purchases   Expense   75,000  
 Capital       12,000   
 Equity 
 Sales   Revenue     1,25,000 
 Creditors   Liabilities     15,000 
 Long-term loan (raised on 1.4.2013)   Liabilities     5,000 
 Commission received   Revenue     5,000 
 Total     1,62,000  1,62,000  
Additional Information : The stock on March 31, 2017 was ` 15,000.
Figure 9.1 : Showing the trial balance of Ankit
We will now study about the items of adjustments and you will observe 
how these adjustments are helpful in the preparation  of ??nancial statements 
in order to re??ect the true pro??t and loss and ??nancial position of the ??rm.
9.2 Closing Stock
As per the example in chapter 9 (Page no. 336), the closing stock represents 
the cost of unsold goods lying in the stores at the end of the accounting period. 
The adjustment with regard to the closing stock is done by (i) by crediting it to 
the trading and pro??t and loss account, and (ii) by showing it on the asset side 
of the balance sheet. The adjustment entry to be recorded in this regard is :
Closing stock A/c Dr.
 To Trading A/c
The closing stock of the year becomes the opening stock of the next year 
and is re??ected in the trial balance of the next year. The trading and pro??t 
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Page 4


318 Accountancy
Financial Statements - II 9
I
n chapter 8, you learnt about the preparation of
simple ??nal accounts in the format of trading 
and pro??t and loss account and balance sheet. The 
preparation of simple ??nal accounts pre-supposes 
the absence of any accounting complexities 
which are normal to business operations. These 
complexities arise due to the fact that the process of 
determining income and ??nancial position is based 
on the accrual basis of accounting. This emphasises 
that while ascertaining the pro??tability, the revenues 
be considered on earned basis and not on receipt 
basis, and the expenses be considered on incurred 
basis and not on paid basis. Hence, many items 
need some adjustment while preparing the ??nancial 
statements. In this chapter we shall discuss all items 
which require adjustments and the way these are 
brought into the books of account and incorporated 
in the ??nal accounts.
9.1 Need for Adjustments
According to accrual concept of accounting, the 
pro??t or loss for an accounting year is not based 
on the revenues realised in cash and the expenses 
paid in cash during that year. There may exist some 
receipts and expenses in the current year which 
partially relate to the previous year or to the next 
year. Also, there may exist incomes and expenses 
relating to the current year that still need to be 
brought into books of account. Such items duly 
adjusted, the ??nal accounts will not re??ect the true 
and fair view of the state of affairs of the business.
LearNiNg o bjectives After studying this chapter, 
you will be able to :
• describe 	 the 	 need 	 for
adjustments while
preparing 	 the 	 ??nancial
statements;
• explain 	 the	 accounting
treatment of adj ust ­ ments for outstanding
and 	 prepaid 	 expenses,
accrued and advance
receipts of incomes;
• d iscuss 	 th e 	 ad just 	 -	
ments to be made re­ garding depreci a ­ tion, 
bad debts, provi sion
for doubtful debts, pro­ vision for discount on
debtors;
• explain 	 the 	 concepts
and adjustment of
m anager ’ s com m i ss i on 
and interest on capital;
• pr epar e 	 pr o??t 	 and	 l oss
account and balance
sheet with adjust­ 
m ents.
Ch-09.indd   318 9/13/2022   5:00:26 PM
Reprint 2025-26
319 Financial Statements - II
For example, an amount of ` 1,200 paid on July 01, 2016 towards insurance 
premium. Any general insurance premium paid usually covers a period of 12 
months. Suppose the accounting year ends on March 31,
 
2017, it would mean 
that one fourth of the insurance premium is paid on July 01, 2016 relate to 
the next accounting year 2017-18. Therefore, while preparing the ??nancial 
statements for 2016-17, the expense on insurance premium that should be 
debited to the pro??t and loss account is ` 900 (` 1,200 – ` 300).
Let us take another example. The salaries for the month of March, 2017 were 
paid on April 07, 2017. This means that the salaries account of 2016-17 does 
not include the salaries for the month of March 2017. Such unpaid salaries is 
termed as salaries outstanding which have to be brought into books of account 
and is debited to pro??t and loss account along with the salaries already paid 
for the month of April, 2016 up to Feburary, 2017.
Similarly, adjustments may also become necessary in respect of certain 
incomes received in advance or those which have accrued but are still to be 
received. Apart from these, there are certain items which are not recorded on 
day-to-day basis such as depreciation on ??xed assets, interest on capital, etc. 
These are adjusted at the time of preparing ??nancial statements. The purpose 
of making various adjustments is to ensure that the ??nal accounts reveal the 
true pro??t or loss and the true ??nancial position of the business. The items 
which usually need adjustments are:
 1. Closing stock
 2. Outstanding/expenses
 3. Prepaid/Unexpired expenses
 4. Accrued income
 5. Income received in advance
 6. Depreciation
 7. Bad debts
 8. Provision for doubtful debts
 9. Provision for discount on debtors
 10. Manager’s commission   
 11. Interest on capital
It may be noted that when we prepare the ??nancial statements, we are 
provided with the trial balance and some other additional information in 
respect of the adjustments to be made. All adjustments are re??ected in the 
??nal accounts at two places to complete the double entry. Our earlier example 
in chapter 8 (Page no. 294) which represents the trial balance of Ankit is 
reproduced in ??gure 9.1:
Ch-09.indd   319 9/13/2022   5:00:26 PM
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320 Accountancy
Trial Balance of Ankit as on March 31, 2017
 Account Title  Elements L.F. Debit Credit
    Amount Amount
    ` `
 Cash   Assets   1,000   
 Bank    Assets   5,000  
 Wages   Expense   8,000  
 Salaries   Expense   25,000  
 Furniture   Assets   15,000   Rent of building   Expense   13,000  
 Debtors   Assets   15,500  
 Bad debts   Expense   4,500  
 Purchases   Expense   75,000  
 Capital       12,000   
 Equity 
 Sales   Revenue     1,25,000 
 Creditors   Liabilities     15,000 
 Long-term loan (raised on 1.4.2013)   Liabilities     5,000 
 Commission received   Revenue     5,000 
 Total     1,62,000  1,62,000  
Additional Information : The stock on March 31, 2017 was ` 15,000.
Figure 9.1 : Showing the trial balance of Ankit
We will now study about the items of adjustments and you will observe 
how these adjustments are helpful in the preparation  of ??nancial statements 
in order to re??ect the true pro??t and loss and ??nancial position of the ??rm.
9.2 Closing Stock
As per the example in chapter 9 (Page no. 336), the closing stock represents 
the cost of unsold goods lying in the stores at the end of the accounting period. 
The adjustment with regard to the closing stock is done by (i) by crediting it to 
the trading and pro??t and loss account, and (ii) by showing it on the asset side 
of the balance sheet. The adjustment entry to be recorded in this regard is :
Closing stock A/c Dr.
 To Trading A/c
The closing stock of the year becomes the opening stock of the next year 
and is re??ected in the trial balance of the next year. The trading and pro??t 
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321 Financial Statements - II
and loss account of Ankit for the year ended March 31, 2017 and his balance 
sheet as on that date shall appear as follows :
Trading and Pro??t and Loss Account of Ankit 
for the year ended March 31, 2017
Dr. Cr.
Expenses/Losses 	 	 	 Amount	  Revenues/Gains	 	 	 Amount
   `   ` 
Purchases   75,000  Sales       1,25,000 
Wages   8,000  Closing stock   15,000 
Gross pro??t c/d   57,000        1,40,000     1,40,000 Salaries   25,000  Gross pro??t b/d   57,000 
Rent of building   13,000  Commission received   5,000 
Bad debts   4,500     
Net pro??t (transferred to  19,500 
Ankit’s capital account)         62,000     62,000 
Sometimes the opening and closing stock are adjusted through purchases 
account. In that case, the entry recorded is as follows :
Closing stock A/c  Dr.
 To Purchases A/c
This entry reduces the amount in the purchases account and is also 
known as adjusted purchases which is shown on the debit side of the trading 
and pro??t and loss account. In this context,  it may be noted, that the closing 
stock will not be shown on the credit side of the trading and pro??t and loss as 
it has been already been adjusted through the purchases account. Not only, 
in such a situation, even the opening stock will not be separately re??ected in 
the trading and pro??t and loss account, as it is also adjusted in purchases by 
recording the following entry:
Purchases A/c  Dr.
 To Opening stock A/c  
Another important point to be noted in this context is that when the 
opening and closing stocks are adjusted through purchases, the trial 
balance does not show any opening stock. Instead, the closing stock 
shall appear in the trial balance (not as additional information or as an 
adjustment item) and so also the adjusted purchases. In such a situation, 
the adjusted purchases shall be debited to the trading and pro??t and 
loss account.
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Page 5


318 Accountancy
Financial Statements - II 9
I
n chapter 8, you learnt about the preparation of
simple ??nal accounts in the format of trading 
and pro??t and loss account and balance sheet. The 
preparation of simple ??nal accounts pre-supposes 
the absence of any accounting complexities 
which are normal to business operations. These 
complexities arise due to the fact that the process of 
determining income and ??nancial position is based 
on the accrual basis of accounting. This emphasises 
that while ascertaining the pro??tability, the revenues 
be considered on earned basis and not on receipt 
basis, and the expenses be considered on incurred 
basis and not on paid basis. Hence, many items 
need some adjustment while preparing the ??nancial 
statements. In this chapter we shall discuss all items 
which require adjustments and the way these are 
brought into the books of account and incorporated 
in the ??nal accounts.
9.1 Need for Adjustments
According to accrual concept of accounting, the 
pro??t or loss for an accounting year is not based 
on the revenues realised in cash and the expenses 
paid in cash during that year. There may exist some 
receipts and expenses in the current year which 
partially relate to the previous year or to the next 
year. Also, there may exist incomes and expenses 
relating to the current year that still need to be 
brought into books of account. Such items duly 
adjusted, the ??nal accounts will not re??ect the true 
and fair view of the state of affairs of the business.
LearNiNg o bjectives After studying this chapter, 
you will be able to :
• describe 	 the 	 need 	 for
adjustments while
preparing 	 the 	 ??nancial
statements;
• explain 	 the	 accounting
treatment of adj ust ­ ments for outstanding
and 	 prepaid 	 expenses,
accrued and advance
receipts of incomes;
• d iscuss 	 th e 	 ad just 	 -	
ments to be made re­ garding depreci a ­ tion, 
bad debts, provi sion
for doubtful debts, pro­ vision for discount on
debtors;
• explain 	 the 	 concepts
and adjustment of
m anager ’ s com m i ss i on 
and interest on capital;
• pr epar e 	 pr o??t 	 and	 l oss
account and balance
sheet with adjust­ 
m ents.
Ch-09.indd   318 9/13/2022   5:00:26 PM
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319 Financial Statements - II
For example, an amount of ` 1,200 paid on July 01, 2016 towards insurance 
premium. Any general insurance premium paid usually covers a period of 12 
months. Suppose the accounting year ends on March 31,
 
2017, it would mean 
that one fourth of the insurance premium is paid on July 01, 2016 relate to 
the next accounting year 2017-18. Therefore, while preparing the ??nancial 
statements for 2016-17, the expense on insurance premium that should be 
debited to the pro??t and loss account is ` 900 (` 1,200 – ` 300).
Let us take another example. The salaries for the month of March, 2017 were 
paid on April 07, 2017. This means that the salaries account of 2016-17 does 
not include the salaries for the month of March 2017. Such unpaid salaries is 
termed as salaries outstanding which have to be brought into books of account 
and is debited to pro??t and loss account along with the salaries already paid 
for the month of April, 2016 up to Feburary, 2017.
Similarly, adjustments may also become necessary in respect of certain 
incomes received in advance or those which have accrued but are still to be 
received. Apart from these, there are certain items which are not recorded on 
day-to-day basis such as depreciation on ??xed assets, interest on capital, etc. 
These are adjusted at the time of preparing ??nancial statements. The purpose 
of making various adjustments is to ensure that the ??nal accounts reveal the 
true pro??t or loss and the true ??nancial position of the business. The items 
which usually need adjustments are:
 1. Closing stock
 2. Outstanding/expenses
 3. Prepaid/Unexpired expenses
 4. Accrued income
 5. Income received in advance
 6. Depreciation
 7. Bad debts
 8. Provision for doubtful debts
 9. Provision for discount on debtors
 10. Manager’s commission   
 11. Interest on capital
It may be noted that when we prepare the ??nancial statements, we are 
provided with the trial balance and some other additional information in 
respect of the adjustments to be made. All adjustments are re??ected in the 
??nal accounts at two places to complete the double entry. Our earlier example 
in chapter 8 (Page no. 294) which represents the trial balance of Ankit is 
reproduced in ??gure 9.1:
Ch-09.indd   319 9/13/2022   5:00:26 PM
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320 Accountancy
Trial Balance of Ankit as on March 31, 2017
 Account Title  Elements L.F. Debit Credit
    Amount Amount
    ` `
 Cash   Assets   1,000   
 Bank    Assets   5,000  
 Wages   Expense   8,000  
 Salaries   Expense   25,000  
 Furniture   Assets   15,000   Rent of building   Expense   13,000  
 Debtors   Assets   15,500  
 Bad debts   Expense   4,500  
 Purchases   Expense   75,000  
 Capital       12,000   
 Equity 
 Sales   Revenue     1,25,000 
 Creditors   Liabilities     15,000 
 Long-term loan (raised on 1.4.2013)   Liabilities     5,000 
 Commission received   Revenue     5,000 
 Total     1,62,000  1,62,000  
Additional Information : The stock on March 31, 2017 was ` 15,000.
Figure 9.1 : Showing the trial balance of Ankit
We will now study about the items of adjustments and you will observe 
how these adjustments are helpful in the preparation  of ??nancial statements 
in order to re??ect the true pro??t and loss and ??nancial position of the ??rm.
9.2 Closing Stock
As per the example in chapter 9 (Page no. 336), the closing stock represents 
the cost of unsold goods lying in the stores at the end of the accounting period. 
The adjustment with regard to the closing stock is done by (i) by crediting it to 
the trading and pro??t and loss account, and (ii) by showing it on the asset side 
of the balance sheet. The adjustment entry to be recorded in this regard is :
Closing stock A/c Dr.
 To Trading A/c
The closing stock of the year becomes the opening stock of the next year 
and is re??ected in the trial balance of the next year. The trading and pro??t 
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321 Financial Statements - II
and loss account of Ankit for the year ended March 31, 2017 and his balance 
sheet as on that date shall appear as follows :
Trading and Pro??t and Loss Account of Ankit 
for the year ended March 31, 2017
Dr. Cr.
Expenses/Losses 	 	 	 Amount	  Revenues/Gains	 	 	 Amount
   `   ` 
Purchases   75,000  Sales       1,25,000 
Wages   8,000  Closing stock   15,000 
Gross pro??t c/d   57,000        1,40,000     1,40,000 Salaries   25,000  Gross pro??t b/d   57,000 
Rent of building   13,000  Commission received   5,000 
Bad debts   4,500     
Net pro??t (transferred to  19,500 
Ankit’s capital account)         62,000     62,000 
Sometimes the opening and closing stock are adjusted through purchases 
account. In that case, the entry recorded is as follows :
Closing stock A/c  Dr.
 To Purchases A/c
This entry reduces the amount in the purchases account and is also 
known as adjusted purchases which is shown on the debit side of the trading 
and pro??t and loss account. In this context,  it may be noted, that the closing 
stock will not be shown on the credit side of the trading and pro??t and loss as 
it has been already been adjusted through the purchases account. Not only, 
in such a situation, even the opening stock will not be separately re??ected in 
the trading and pro??t and loss account, as it is also adjusted in purchases by 
recording the following entry:
Purchases A/c  Dr.
 To Opening stock A/c  
Another important point to be noted in this context is that when the 
opening and closing stocks are adjusted through purchases, the trial 
balance does not show any opening stock. Instead, the closing stock 
shall appear in the trial balance (not as additional information or as an 
adjustment item) and so also the adjusted purchases. In such a situation, 
the adjusted purchases shall be debited to the trading and pro??t and 
loss account.
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322 Accountancy
The closing stock shall be shown on the assets side of the balance sheet as 
shown below:
Balance Sheet of Ankit as at March 31, 2017
Liabilities   Amount  Assets   Amount   `   `
Owners funds     Non­ Current Assets   
Capital 12,000   Furniture   15,000 
 Add  Net pro??t  19,500  31,500  Current Assets   
Non­ Current Liabilities     Debtors   15,500 
Long-term loan   5,000  Bank   5,000 
Current Liabilities     Cash   1,000 
Creditors   15,000  Closing stock   15,000 
   51,500     51,500 9.3 Outstanding Expenses
It is quite common for a business enterprise to have some unpaid expenses 
in the normal course of business operations at the end of an accounting year. 
Such items usually are wages, salaries, interest on loan, etc.
When expenses of an accounting period remain unpaid at the end of an 
accounting period, they are termed as outstanding	 expenses. As they relate to 
the earning of revenue during the current accounting year, it is logical that 
they should be duly charged against revenue for computation of the correct 
amount of pro??t or loss. The entry to bring such expenses into account is :
Concerned expense A/c  Dr.
 To Outstanding expense A/c
The above entry opens a new account called Outstanding 	 Expenses which is 
shown on the liabilities side of the balance sheet. The amount of outstanding 
expenses is added to the total of expenses under a particular head for the 
purpose of preparing trading and pro??t and loss account. 
For example, refer to Ankit’s trial balance (refer ??gure 10.1). You will notice 
that wages are shown at ` 8,000. Let us assume that Ankit owes `500 as 
wages relating to the year 2016-17 to one of his employees. In that case, the 
correct expense on wages amounts to ` 8,500 instead of ` 8,000. Ankit must 
show ` 8,500 as expense on account of wages in the trading and pro??t and 
loss account and recognise a current liability of ` 500 towards the sum owed 
to his staff. It will be referred to as wages outstanding and it  will be adjusted 
to wages account by recording the following journal entry:
Wages A/c Dr. 500
 To Wages outstanding A/c   500
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