Introduction - Financial Statements: With Adjustments Commerce Notes | EduRev

Crash Course of Accountancy - Class 11

Created by: Nipuns Institute

Commerce : Introduction - Financial Statements: With Adjustments Commerce Notes | EduRev

 Page 1


          
                                                       
 
 
  
  
1. Closing Stock 
The amount of goods unsold at the end of the year is called Closing Stock. As Closing Stock 
 
• Valuation of Closing Stock: It is valued at cost or net realisable value (market price), whichever is less. For example, if cost 
price of the closing stock is Rs. 40,000, but its net realisable value at present is Rs. 55,000, then it will be shown at Rs. 40,000 
and not at Rs. 55,000. However, if the net realisable value is just Rs. 30,000, then it will be valued at Rs. 30,000. 
 
• Adjustment Entry: If Closing Stock is valued at Rs. 40,000, then following adjusting entry will be passed at the end of the 
year: 
Closing Stock A/c Dr. 40,000 
To Trading A/c 40,000 
• Accounting Treatment of Closing Stock: Its accounting treatment depends on the fact whether the closing stock is given 
inside or outside the Trial Balance. 
0
 When Closing Stock is given outside the Trial Balance:  
¦ It is shown on the credit side of Trading Account; and 
¦ It is shown on the assets side of the Balance Sheet as a separate item under Current Assets. 
Dr. TRADING ACCOUNT Cr. BALANCE SHEET  
Particulars (Rs.) Particulars (Rs.) Liabilities (Rs.) Assets (Rs.) 
  By Closing Stock 40,000   Closing Stock 40,000 
 
° When Closing Stock is given inside the Trial Balance: 
• It is ONLY shown on the assets side of the Balance Sheet as a separate item under Current Assets. 
BALANCE SHEET 
Liabilities (Rs.) Assets 
Closing Stock 
(Rs.) 
40,000 
 
2. Outstanding Expenses OR Expenses Due but not Paid 
Outstanding Expenses refer to the expenses, which have become due for payment during the accounting period, but have 
not been paid yet. 
• Adjustment Entry: The following Journal Entry is passed in case of such outstanding expenses: 
Expenses A/c Dr. 
To Expenses Outstanding A/c 
 
• Accounting Treatment 
if outstanding expenses have been mentioned outside the Trial Balance-  
? Add in the concerned expenses on the debit side of trading or P & l a/c 
? Also added to the liability side of the balancesheet 
if outstanding expenses have been mentioned inside the Trial Balance-  
? added to the liability side of the balancesheet 
 
Case 1 Following is the extract of Trial Balance as on 31
st
 March, 2015: 
Particulars Dr.(Rs.) Cr.(Rs.) 
1 Wages 6,500  
Additional Information: Wages outstanding Rs. 500 
Solution 
Treatment in Final Accounts: 
• Wages of Rs. 500 will be added to 'Wages' on the debit side of Trading Account. 
• Such wages will also be shown on the liabilities side of the Balance Sheet. 
Dr. TRADING ACCOUNT Cr. BALANCE SHEET  
Particulars (Rs.) Particulars (Rs.) Liabilities (Rs.) Assets (Rs.) 
To Wages 6,500    Wages 
Outstanding 
500   
Page 2


          
                                                       
 
 
  
  
1. Closing Stock 
The amount of goods unsold at the end of the year is called Closing Stock. As Closing Stock 
 
• Valuation of Closing Stock: It is valued at cost or net realisable value (market price), whichever is less. For example, if cost 
price of the closing stock is Rs. 40,000, but its net realisable value at present is Rs. 55,000, then it will be shown at Rs. 40,000 
and not at Rs. 55,000. However, if the net realisable value is just Rs. 30,000, then it will be valued at Rs. 30,000. 
 
• Adjustment Entry: If Closing Stock is valued at Rs. 40,000, then following adjusting entry will be passed at the end of the 
year: 
Closing Stock A/c Dr. 40,000 
To Trading A/c 40,000 
• Accounting Treatment of Closing Stock: Its accounting treatment depends on the fact whether the closing stock is given 
inside or outside the Trial Balance. 
0
 When Closing Stock is given outside the Trial Balance:  
¦ It is shown on the credit side of Trading Account; and 
¦ It is shown on the assets side of the Balance Sheet as a separate item under Current Assets. 
Dr. TRADING ACCOUNT Cr. BALANCE SHEET  
Particulars (Rs.) Particulars (Rs.) Liabilities (Rs.) Assets (Rs.) 
  By Closing Stock 40,000   Closing Stock 40,000 
 
° When Closing Stock is given inside the Trial Balance: 
• It is ONLY shown on the assets side of the Balance Sheet as a separate item under Current Assets. 
BALANCE SHEET 
Liabilities (Rs.) Assets 
Closing Stock 
(Rs.) 
40,000 
 
2. Outstanding Expenses OR Expenses Due but not Paid 
Outstanding Expenses refer to the expenses, which have become due for payment during the accounting period, but have 
not been paid yet. 
• Adjustment Entry: The following Journal Entry is passed in case of such outstanding expenses: 
Expenses A/c Dr. 
To Expenses Outstanding A/c 
 
• Accounting Treatment 
if outstanding expenses have been mentioned outside the Trial Balance-  
? Add in the concerned expenses on the debit side of trading or P & l a/c 
? Also added to the liability side of the balancesheet 
if outstanding expenses have been mentioned inside the Trial Balance-  
? added to the liability side of the balancesheet 
 
Case 1 Following is the extract of Trial Balance as on 31
st
 March, 2015: 
Particulars Dr.(Rs.) Cr.(Rs.) 
1 Wages 6,500  
Additional Information: Wages outstanding Rs. 500 
Solution 
Treatment in Final Accounts: 
• Wages of Rs. 500 will be added to 'Wages' on the debit side of Trading Account. 
• Such wages will also be shown on the liabilities side of the Balance Sheet. 
Dr. TRADING ACCOUNT Cr. BALANCE SHEET  
Particulars (Rs.) Particulars (Rs.) Liabilities (Rs.) Assets (Rs.) 
To Wages 6,500    Wages 
Outstanding 
500   
          
                                                       
 
Add: Wages     
 
   
Outstanding-, 500 7,000    
 
   
 
Case 2 From the following extract of Trial Balance as on 31
st
 March, 2015, show the relevant extract from the Trading 
Account and the Balance Sheet. 
Particulars Dr.(Rs.) Cr. (Rs.) 
Wages 6,600  
Additional Information:-  
Wages are paid for 11 months 
Wages is outstanding for 1 month 
Expeneses for wages are uniform and for those of march are not paid  
 
Solution: 
Dr. TRADING ACCOUNT Cr. BALANCE SHEET  
Particulars (Rs.) Particulars (Rs.) Liabilities (Rs.) Assets (Rs.) 
To Wages 6,600    Wages Outstanding 600   
Add: Wages     
 
   
Outstanding-, 600 7,200    
 
   
 
Case 3 Following is the extract of Trial Balance as on 31
st
 March, 2015: 
Particulars Dr.(Rs.) cr.(Rs.) 
Rent 3,000  
Additional Information: Rent is paid only for 3 quarters.  
Solution: 
Dr. PROFIT AND LOSS ACCOUNT Cr.   BALANCE SHEET  
Particulars (Rs.) Particulars (Rs.) Liabilities   (Rs.) Assets (Rs.) 
To Rent 3,000    Rent Outstanding   1,000   
Add: Rent          
Outstanding-, 1,000 4,000         
 
3. Prepaid Expenses OR Unexpired Expenses OR Expenses Paid in Advance 
Prepaid Expenses refer to the expenses, which have been paid in advance, i.e. they are not yet due but paid 
• Adjustment Entry: The following Journal Entry is passed for prepaid expenses: 
Prepaid Expenses A/c Dr. 
To Expenses A/c 
 
• Accounting Treatment: 
if prepaid expenses have been mentioned outside the Trial Balance 
? prepaid expenses are deducted from the concerned expense on the debit side of Trading or Profit and Loss 
Account 
? shown on the assets side of the Balance Sheet as a separate item under Current Assets. 
if prepaid expenses have been mentioned inside the Trial Balance 
? shown on the assets side of the Balance Sheet as a separate item under Current Assets. 
 
Case 1 From the following extract of Trial Balance as on 31
st
 March, 2015,  
Particulars Dr.(Rs.) Cr.(Rs.) 
Wages 13,000  
Additional Information- 
- wages are payable @ Rs.1000 per month 
- wages have been paid for 13 month 
 
 
Page 3


          
                                                       
 
 
  
  
1. Closing Stock 
The amount of goods unsold at the end of the year is called Closing Stock. As Closing Stock 
 
• Valuation of Closing Stock: It is valued at cost or net realisable value (market price), whichever is less. For example, if cost 
price of the closing stock is Rs. 40,000, but its net realisable value at present is Rs. 55,000, then it will be shown at Rs. 40,000 
and not at Rs. 55,000. However, if the net realisable value is just Rs. 30,000, then it will be valued at Rs. 30,000. 
 
• Adjustment Entry: If Closing Stock is valued at Rs. 40,000, then following adjusting entry will be passed at the end of the 
year: 
Closing Stock A/c Dr. 40,000 
To Trading A/c 40,000 
• Accounting Treatment of Closing Stock: Its accounting treatment depends on the fact whether the closing stock is given 
inside or outside the Trial Balance. 
0
 When Closing Stock is given outside the Trial Balance:  
¦ It is shown on the credit side of Trading Account; and 
¦ It is shown on the assets side of the Balance Sheet as a separate item under Current Assets. 
Dr. TRADING ACCOUNT Cr. BALANCE SHEET  
Particulars (Rs.) Particulars (Rs.) Liabilities (Rs.) Assets (Rs.) 
  By Closing Stock 40,000   Closing Stock 40,000 
 
° When Closing Stock is given inside the Trial Balance: 
• It is ONLY shown on the assets side of the Balance Sheet as a separate item under Current Assets. 
BALANCE SHEET 
Liabilities (Rs.) Assets 
Closing Stock 
(Rs.) 
40,000 
 
2. Outstanding Expenses OR Expenses Due but not Paid 
Outstanding Expenses refer to the expenses, which have become due for payment during the accounting period, but have 
not been paid yet. 
• Adjustment Entry: The following Journal Entry is passed in case of such outstanding expenses: 
Expenses A/c Dr. 
To Expenses Outstanding A/c 
 
• Accounting Treatment 
if outstanding expenses have been mentioned outside the Trial Balance-  
? Add in the concerned expenses on the debit side of trading or P & l a/c 
? Also added to the liability side of the balancesheet 
if outstanding expenses have been mentioned inside the Trial Balance-  
? added to the liability side of the balancesheet 
 
Case 1 Following is the extract of Trial Balance as on 31
st
 March, 2015: 
Particulars Dr.(Rs.) Cr.(Rs.) 
1 Wages 6,500  
Additional Information: Wages outstanding Rs. 500 
Solution 
Treatment in Final Accounts: 
• Wages of Rs. 500 will be added to 'Wages' on the debit side of Trading Account. 
• Such wages will also be shown on the liabilities side of the Balance Sheet. 
Dr. TRADING ACCOUNT Cr. BALANCE SHEET  
Particulars (Rs.) Particulars (Rs.) Liabilities (Rs.) Assets (Rs.) 
To Wages 6,500    Wages 
Outstanding 
500   
          
                                                       
 
Add: Wages     
 
   
Outstanding-, 500 7,000    
 
   
 
Case 2 From the following extract of Trial Balance as on 31
st
 March, 2015, show the relevant extract from the Trading 
Account and the Balance Sheet. 
Particulars Dr.(Rs.) Cr. (Rs.) 
Wages 6,600  
Additional Information:-  
Wages are paid for 11 months 
Wages is outstanding for 1 month 
Expeneses for wages are uniform and for those of march are not paid  
 
Solution: 
Dr. TRADING ACCOUNT Cr. BALANCE SHEET  
Particulars (Rs.) Particulars (Rs.) Liabilities (Rs.) Assets (Rs.) 
To Wages 6,600    Wages Outstanding 600   
Add: Wages     
 
   
Outstanding-, 600 7,200    
 
   
 
Case 3 Following is the extract of Trial Balance as on 31
st
 March, 2015: 
Particulars Dr.(Rs.) cr.(Rs.) 
Rent 3,000  
Additional Information: Rent is paid only for 3 quarters.  
Solution: 
Dr. PROFIT AND LOSS ACCOUNT Cr.   BALANCE SHEET  
Particulars (Rs.) Particulars (Rs.) Liabilities   (Rs.) Assets (Rs.) 
To Rent 3,000    Rent Outstanding   1,000   
Add: Rent          
Outstanding-, 1,000 4,000         
 
3. Prepaid Expenses OR Unexpired Expenses OR Expenses Paid in Advance 
Prepaid Expenses refer to the expenses, which have been paid in advance, i.e. they are not yet due but paid 
• Adjustment Entry: The following Journal Entry is passed for prepaid expenses: 
Prepaid Expenses A/c Dr. 
To Expenses A/c 
 
• Accounting Treatment: 
if prepaid expenses have been mentioned outside the Trial Balance 
? prepaid expenses are deducted from the concerned expense on the debit side of Trading or Profit and Loss 
Account 
? shown on the assets side of the Balance Sheet as a separate item under Current Assets. 
if prepaid expenses have been mentioned inside the Trial Balance 
? shown on the assets side of the Balance Sheet as a separate item under Current Assets. 
 
Case 1 From the following extract of Trial Balance as on 31
st
 March, 2015,  
Particulars Dr.(Rs.) Cr.(Rs.) 
Wages 13,000  
Additional Information- 
- wages are payable @ Rs.1000 per month 
- wages have been paid for 13 month 
 
 
          
                                                       
 
Solution: 
Dr. TRADING ACCOUNT ___________ Cr. _________ BALANCE SHEET 
Particulars  (Rs.) Particulars (Rs.) Liabilities (Rs.) Assets (Rs.) 
To Wages 13,000      Prepaid Wages 1,000 
Less: Prepaid         
Wages-, 1.000 12,000       
 
 
Case 2 Following is the extract of Trial Balance as on 31
st
 March, 2015: 
Particulars Dr.(Rs.) Cr.(Rs.) 
Insurance 18,000  
Additional Information: Insurance is paid upto 30
th
 September, 2015. Show the relevant extract from the Profit and Loss 
Account and the Balance Sheet. 
Solution: 
insurance of 6 months is prepaid,  
Dr. PROFIT AND LOSS ACCOUNT Cr.  BALANCE SHEET  
Particulars (Rs.) Particulars (Rs.) Liabilities  (Rs.) Assets (Rs.) 
To Insurance 18,000       Prepaid Insurance 6,000 
Less: Prepaid         
Insurance -, 6,000 12,000        
 
Case 3 Following is the extract of Trial Balance as on 31
st
 March, 2015: 
Particulars Dr.(Rs.) Cr.(Rs.) 
Insurance 6,000 ..... 
Additional Information: Insurance is paid for the year ending 30
th
 June, 2015. Show the relevant extract from the Profit and 
Loss Account and the Balance Sheet. 
 
Solution:  
Prepaid Insurance = Rs. 6,000 x 3/12 = Rs. 1,500. 
Dr. PROFIT AND LOSS ACCOUNT Cr.  BALANCE SHEET  
Particulars (Rs.) Particulars (Rs.) Liabilities  (Rs.) Assets (Rs.) 
To Insurance 6,000       Prepaid 
Insurance 
1,500 
Less: Prepaid         
Insurance -, 1,500 4,500        
 
4. Depreciation 
Depreciation refers to a fall in the value of fixed assets due to normal wear and tear, passage of time or expected 
obsolescence (change in technology). 
• Adjustment Entry: The Journal Entries passed for charging depreciation and transferring it to Profit and Loss Account are: 
 (i) Depreciation A/c Dr. 
To Asset A/c 
(Being depreciation provided) 
(ii) Profit and Loss A/c Dr. 
To Depreciation A/c 
(Being depreciation transferred to Profit and Loss Account) 
 
• Accounting Treatment: 
• When Depreciation is mentioned inside the Trial Balance 
depreciation is shown only on the debit side of Profit and Loss Account 
 
• When Depreciation is mentioned outside the Trial Balance 
depreciation is shown the debit side of Profit and Loss Account 
subtracted from Assets side of the Balance Sheet. 
Case 1 Following is the extract of Trial Balance as on 31
st
 March, 2015: 
Particulars Dr.(Rs.) Cr.(Rs.) 
Page 4


          
                                                       
 
 
  
  
1. Closing Stock 
The amount of goods unsold at the end of the year is called Closing Stock. As Closing Stock 
 
• Valuation of Closing Stock: It is valued at cost or net realisable value (market price), whichever is less. For example, if cost 
price of the closing stock is Rs. 40,000, but its net realisable value at present is Rs. 55,000, then it will be shown at Rs. 40,000 
and not at Rs. 55,000. However, if the net realisable value is just Rs. 30,000, then it will be valued at Rs. 30,000. 
 
• Adjustment Entry: If Closing Stock is valued at Rs. 40,000, then following adjusting entry will be passed at the end of the 
year: 
Closing Stock A/c Dr. 40,000 
To Trading A/c 40,000 
• Accounting Treatment of Closing Stock: Its accounting treatment depends on the fact whether the closing stock is given 
inside or outside the Trial Balance. 
0
 When Closing Stock is given outside the Trial Balance:  
¦ It is shown on the credit side of Trading Account; and 
¦ It is shown on the assets side of the Balance Sheet as a separate item under Current Assets. 
Dr. TRADING ACCOUNT Cr. BALANCE SHEET  
Particulars (Rs.) Particulars (Rs.) Liabilities (Rs.) Assets (Rs.) 
  By Closing Stock 40,000   Closing Stock 40,000 
 
° When Closing Stock is given inside the Trial Balance: 
• It is ONLY shown on the assets side of the Balance Sheet as a separate item under Current Assets. 
BALANCE SHEET 
Liabilities (Rs.) Assets 
Closing Stock 
(Rs.) 
40,000 
 
2. Outstanding Expenses OR Expenses Due but not Paid 
Outstanding Expenses refer to the expenses, which have become due for payment during the accounting period, but have 
not been paid yet. 
• Adjustment Entry: The following Journal Entry is passed in case of such outstanding expenses: 
Expenses A/c Dr. 
To Expenses Outstanding A/c 
 
• Accounting Treatment 
if outstanding expenses have been mentioned outside the Trial Balance-  
? Add in the concerned expenses on the debit side of trading or P & l a/c 
? Also added to the liability side of the balancesheet 
if outstanding expenses have been mentioned inside the Trial Balance-  
? added to the liability side of the balancesheet 
 
Case 1 Following is the extract of Trial Balance as on 31
st
 March, 2015: 
Particulars Dr.(Rs.) Cr.(Rs.) 
1 Wages 6,500  
Additional Information: Wages outstanding Rs. 500 
Solution 
Treatment in Final Accounts: 
• Wages of Rs. 500 will be added to 'Wages' on the debit side of Trading Account. 
• Such wages will also be shown on the liabilities side of the Balance Sheet. 
Dr. TRADING ACCOUNT Cr. BALANCE SHEET  
Particulars (Rs.) Particulars (Rs.) Liabilities (Rs.) Assets (Rs.) 
To Wages 6,500    Wages 
Outstanding 
500   
          
                                                       
 
Add: Wages     
 
   
Outstanding-, 500 7,000    
 
   
 
Case 2 From the following extract of Trial Balance as on 31
st
 March, 2015, show the relevant extract from the Trading 
Account and the Balance Sheet. 
Particulars Dr.(Rs.) Cr. (Rs.) 
Wages 6,600  
Additional Information:-  
Wages are paid for 11 months 
Wages is outstanding for 1 month 
Expeneses for wages are uniform and for those of march are not paid  
 
Solution: 
Dr. TRADING ACCOUNT Cr. BALANCE SHEET  
Particulars (Rs.) Particulars (Rs.) Liabilities (Rs.) Assets (Rs.) 
To Wages 6,600    Wages Outstanding 600   
Add: Wages     
 
   
Outstanding-, 600 7,200    
 
   
 
Case 3 Following is the extract of Trial Balance as on 31
st
 March, 2015: 
Particulars Dr.(Rs.) cr.(Rs.) 
Rent 3,000  
Additional Information: Rent is paid only for 3 quarters.  
Solution: 
Dr. PROFIT AND LOSS ACCOUNT Cr.   BALANCE SHEET  
Particulars (Rs.) Particulars (Rs.) Liabilities   (Rs.) Assets (Rs.) 
To Rent 3,000    Rent Outstanding   1,000   
Add: Rent          
Outstanding-, 1,000 4,000         
 
3. Prepaid Expenses OR Unexpired Expenses OR Expenses Paid in Advance 
Prepaid Expenses refer to the expenses, which have been paid in advance, i.e. they are not yet due but paid 
• Adjustment Entry: The following Journal Entry is passed for prepaid expenses: 
Prepaid Expenses A/c Dr. 
To Expenses A/c 
 
• Accounting Treatment: 
if prepaid expenses have been mentioned outside the Trial Balance 
? prepaid expenses are deducted from the concerned expense on the debit side of Trading or Profit and Loss 
Account 
? shown on the assets side of the Balance Sheet as a separate item under Current Assets. 
if prepaid expenses have been mentioned inside the Trial Balance 
? shown on the assets side of the Balance Sheet as a separate item under Current Assets. 
 
Case 1 From the following extract of Trial Balance as on 31
st
 March, 2015,  
Particulars Dr.(Rs.) Cr.(Rs.) 
Wages 13,000  
Additional Information- 
- wages are payable @ Rs.1000 per month 
- wages have been paid for 13 month 
 
 
          
                                                       
 
Solution: 
Dr. TRADING ACCOUNT ___________ Cr. _________ BALANCE SHEET 
Particulars  (Rs.) Particulars (Rs.) Liabilities (Rs.) Assets (Rs.) 
To Wages 13,000      Prepaid Wages 1,000 
Less: Prepaid         
Wages-, 1.000 12,000       
 
 
Case 2 Following is the extract of Trial Balance as on 31
st
 March, 2015: 
Particulars Dr.(Rs.) Cr.(Rs.) 
Insurance 18,000  
Additional Information: Insurance is paid upto 30
th
 September, 2015. Show the relevant extract from the Profit and Loss 
Account and the Balance Sheet. 
Solution: 
insurance of 6 months is prepaid,  
Dr. PROFIT AND LOSS ACCOUNT Cr.  BALANCE SHEET  
Particulars (Rs.) Particulars (Rs.) Liabilities  (Rs.) Assets (Rs.) 
To Insurance 18,000       Prepaid Insurance 6,000 
Less: Prepaid         
Insurance -, 6,000 12,000        
 
Case 3 Following is the extract of Trial Balance as on 31
st
 March, 2015: 
Particulars Dr.(Rs.) Cr.(Rs.) 
Insurance 6,000 ..... 
Additional Information: Insurance is paid for the year ending 30
th
 June, 2015. Show the relevant extract from the Profit and 
Loss Account and the Balance Sheet. 
 
Solution:  
Prepaid Insurance = Rs. 6,000 x 3/12 = Rs. 1,500. 
Dr. PROFIT AND LOSS ACCOUNT Cr.  BALANCE SHEET  
Particulars (Rs.) Particulars (Rs.) Liabilities  (Rs.) Assets (Rs.) 
To Insurance 6,000       Prepaid 
Insurance 
1,500 
Less: Prepaid         
Insurance -, 1,500 4,500        
 
4. Depreciation 
Depreciation refers to a fall in the value of fixed assets due to normal wear and tear, passage of time or expected 
obsolescence (change in technology). 
• Adjustment Entry: The Journal Entries passed for charging depreciation and transferring it to Profit and Loss Account are: 
 (i) Depreciation A/c Dr. 
To Asset A/c 
(Being depreciation provided) 
(ii) Profit and Loss A/c Dr. 
To Depreciation A/c 
(Being depreciation transferred to Profit and Loss Account) 
 
• Accounting Treatment: 
• When Depreciation is mentioned inside the Trial Balance 
depreciation is shown only on the debit side of Profit and Loss Account 
 
• When Depreciation is mentioned outside the Trial Balance 
depreciation is shown the debit side of Profit and Loss Account 
subtracted from Assets side of the Balance Sheet. 
Case 1 Following is the extract of Trial Balance as on 31
st
 March, 2015: 
Particulars Dr.(Rs.) Cr.(Rs.) 
          
                                                       
 
Machinery 50,000  
Additional Information: Depreciate Machinery @ 10% p.a. 
Solution: 
Dr. PROFIT AND LOSS ACCOUNT Cr.  BALANCE SHEET   
Particulars (Rs.) Particulars (Rs.) Liabilities (Rs.) Assets  (Rs.) 
To Depreciation Rs. 50,000 x 
10%) 
5,000     Machinery 50,000  
      Less: Depreciation 5,000 45,000 
 
Case 2 Following is the extract of Trial Balance as on 31
st
 December, 2015: 
Particulars Dr. (Rs.) Cr.(Rs.) 
Machinery 50,000  
Additional Information: Machinery includes a machinery purchased on 1
st
 July, 2015 for Rs. 20,000 Depreciate machinery 
@ 10% p.a. 
 
Solution: 
PROFIT AND LOSS ACCOUNT     BALANCE SHEET 
Particulars (Rs.) Particulars (Rs.) Liabilities (Rs.) Assets (Rs.) 
To Depreciation  4,000     Machinery 50,000  
      Less: Depreciation 4,000 46,000 
 
5. Accrued Income OR Income Due but not Received 
Accrued Income refer to an income, which has been earned during the accounting period, but has not yet received. 
 
• Adjustment Entry: The following Journal Entry is passed for accrued income: 
Accrued Income A/c Dr. 
To Income A/c 
 
• Accounting Treatment: 
Inside the Trial Balance- assets side of the Balance Sheet 
Outside the Trial Balance - assets side of the Balance Sheet 
   - added in the P&l a/c cr.side 
 
Case 1 
From the following extract of Trial Balance as on 31
st
 March, 2015,  
Particulars Dr (Rs.) Cr,(Rs.) 
Commission  5,000 
 
Additional information –  
Commission is recived for 10 months 
Commission is recievable @ Rs. 500 per month 
Accured commission Rs.1000 
Solution; 
PROFIT AND LOSS ACCOUNT     BALANCE SHEET 
Particulars  (Rs.) Particulars  (Rs.) Liabilities (Rs.) Assets (Rs.) 
   By 
Commission 
5,000     Accrued 
Commission 
1,000 
 
    Add: Accrued 
Commission 
1,000 6,000    
        
 
 
Implied interest 
Case 2 From the following extract of Trial Balance as on 31
st
 March, 2015,  
Particulars Dr.(Rs.) Cr.(Rs.) 
10% Fixed Deposits (on 1
s
'January, 2015) 20,000  
Interest on Fixed Deposits  300 
Page 5


          
                                                       
 
 
  
  
1. Closing Stock 
The amount of goods unsold at the end of the year is called Closing Stock. As Closing Stock 
 
• Valuation of Closing Stock: It is valued at cost or net realisable value (market price), whichever is less. For example, if cost 
price of the closing stock is Rs. 40,000, but its net realisable value at present is Rs. 55,000, then it will be shown at Rs. 40,000 
and not at Rs. 55,000. However, if the net realisable value is just Rs. 30,000, then it will be valued at Rs. 30,000. 
 
• Adjustment Entry: If Closing Stock is valued at Rs. 40,000, then following adjusting entry will be passed at the end of the 
year: 
Closing Stock A/c Dr. 40,000 
To Trading A/c 40,000 
• Accounting Treatment of Closing Stock: Its accounting treatment depends on the fact whether the closing stock is given 
inside or outside the Trial Balance. 
0
 When Closing Stock is given outside the Trial Balance:  
¦ It is shown on the credit side of Trading Account; and 
¦ It is shown on the assets side of the Balance Sheet as a separate item under Current Assets. 
Dr. TRADING ACCOUNT Cr. BALANCE SHEET  
Particulars (Rs.) Particulars (Rs.) Liabilities (Rs.) Assets (Rs.) 
  By Closing Stock 40,000   Closing Stock 40,000 
 
° When Closing Stock is given inside the Trial Balance: 
• It is ONLY shown on the assets side of the Balance Sheet as a separate item under Current Assets. 
BALANCE SHEET 
Liabilities (Rs.) Assets 
Closing Stock 
(Rs.) 
40,000 
 
2. Outstanding Expenses OR Expenses Due but not Paid 
Outstanding Expenses refer to the expenses, which have become due for payment during the accounting period, but have 
not been paid yet. 
• Adjustment Entry: The following Journal Entry is passed in case of such outstanding expenses: 
Expenses A/c Dr. 
To Expenses Outstanding A/c 
 
• Accounting Treatment 
if outstanding expenses have been mentioned outside the Trial Balance-  
? Add in the concerned expenses on the debit side of trading or P & l a/c 
? Also added to the liability side of the balancesheet 
if outstanding expenses have been mentioned inside the Trial Balance-  
? added to the liability side of the balancesheet 
 
Case 1 Following is the extract of Trial Balance as on 31
st
 March, 2015: 
Particulars Dr.(Rs.) Cr.(Rs.) 
1 Wages 6,500  
Additional Information: Wages outstanding Rs. 500 
Solution 
Treatment in Final Accounts: 
• Wages of Rs. 500 will be added to 'Wages' on the debit side of Trading Account. 
• Such wages will also be shown on the liabilities side of the Balance Sheet. 
Dr. TRADING ACCOUNT Cr. BALANCE SHEET  
Particulars (Rs.) Particulars (Rs.) Liabilities (Rs.) Assets (Rs.) 
To Wages 6,500    Wages 
Outstanding 
500   
          
                                                       
 
Add: Wages     
 
   
Outstanding-, 500 7,000    
 
   
 
Case 2 From the following extract of Trial Balance as on 31
st
 March, 2015, show the relevant extract from the Trading 
Account and the Balance Sheet. 
Particulars Dr.(Rs.) Cr. (Rs.) 
Wages 6,600  
Additional Information:-  
Wages are paid for 11 months 
Wages is outstanding for 1 month 
Expeneses for wages are uniform and for those of march are not paid  
 
Solution: 
Dr. TRADING ACCOUNT Cr. BALANCE SHEET  
Particulars (Rs.) Particulars (Rs.) Liabilities (Rs.) Assets (Rs.) 
To Wages 6,600    Wages Outstanding 600   
Add: Wages     
 
   
Outstanding-, 600 7,200    
 
   
 
Case 3 Following is the extract of Trial Balance as on 31
st
 March, 2015: 
Particulars Dr.(Rs.) cr.(Rs.) 
Rent 3,000  
Additional Information: Rent is paid only for 3 quarters.  
Solution: 
Dr. PROFIT AND LOSS ACCOUNT Cr.   BALANCE SHEET  
Particulars (Rs.) Particulars (Rs.) Liabilities   (Rs.) Assets (Rs.) 
To Rent 3,000    Rent Outstanding   1,000   
Add: Rent          
Outstanding-, 1,000 4,000         
 
3. Prepaid Expenses OR Unexpired Expenses OR Expenses Paid in Advance 
Prepaid Expenses refer to the expenses, which have been paid in advance, i.e. they are not yet due but paid 
• Adjustment Entry: The following Journal Entry is passed for prepaid expenses: 
Prepaid Expenses A/c Dr. 
To Expenses A/c 
 
• Accounting Treatment: 
if prepaid expenses have been mentioned outside the Trial Balance 
? prepaid expenses are deducted from the concerned expense on the debit side of Trading or Profit and Loss 
Account 
? shown on the assets side of the Balance Sheet as a separate item under Current Assets. 
if prepaid expenses have been mentioned inside the Trial Balance 
? shown on the assets side of the Balance Sheet as a separate item under Current Assets. 
 
Case 1 From the following extract of Trial Balance as on 31
st
 March, 2015,  
Particulars Dr.(Rs.) Cr.(Rs.) 
Wages 13,000  
Additional Information- 
- wages are payable @ Rs.1000 per month 
- wages have been paid for 13 month 
 
 
          
                                                       
 
Solution: 
Dr. TRADING ACCOUNT ___________ Cr. _________ BALANCE SHEET 
Particulars  (Rs.) Particulars (Rs.) Liabilities (Rs.) Assets (Rs.) 
To Wages 13,000      Prepaid Wages 1,000 
Less: Prepaid         
Wages-, 1.000 12,000       
 
 
Case 2 Following is the extract of Trial Balance as on 31
st
 March, 2015: 
Particulars Dr.(Rs.) Cr.(Rs.) 
Insurance 18,000  
Additional Information: Insurance is paid upto 30
th
 September, 2015. Show the relevant extract from the Profit and Loss 
Account and the Balance Sheet. 
Solution: 
insurance of 6 months is prepaid,  
Dr. PROFIT AND LOSS ACCOUNT Cr.  BALANCE SHEET  
Particulars (Rs.) Particulars (Rs.) Liabilities  (Rs.) Assets (Rs.) 
To Insurance 18,000       Prepaid Insurance 6,000 
Less: Prepaid         
Insurance -, 6,000 12,000        
 
Case 3 Following is the extract of Trial Balance as on 31
st
 March, 2015: 
Particulars Dr.(Rs.) Cr.(Rs.) 
Insurance 6,000 ..... 
Additional Information: Insurance is paid for the year ending 30
th
 June, 2015. Show the relevant extract from the Profit and 
Loss Account and the Balance Sheet. 
 
Solution:  
Prepaid Insurance = Rs. 6,000 x 3/12 = Rs. 1,500. 
Dr. PROFIT AND LOSS ACCOUNT Cr.  BALANCE SHEET  
Particulars (Rs.) Particulars (Rs.) Liabilities  (Rs.) Assets (Rs.) 
To Insurance 6,000       Prepaid 
Insurance 
1,500 
Less: Prepaid         
Insurance -, 1,500 4,500        
 
4. Depreciation 
Depreciation refers to a fall in the value of fixed assets due to normal wear and tear, passage of time or expected 
obsolescence (change in technology). 
• Adjustment Entry: The Journal Entries passed for charging depreciation and transferring it to Profit and Loss Account are: 
 (i) Depreciation A/c Dr. 
To Asset A/c 
(Being depreciation provided) 
(ii) Profit and Loss A/c Dr. 
To Depreciation A/c 
(Being depreciation transferred to Profit and Loss Account) 
 
• Accounting Treatment: 
• When Depreciation is mentioned inside the Trial Balance 
depreciation is shown only on the debit side of Profit and Loss Account 
 
• When Depreciation is mentioned outside the Trial Balance 
depreciation is shown the debit side of Profit and Loss Account 
subtracted from Assets side of the Balance Sheet. 
Case 1 Following is the extract of Trial Balance as on 31
st
 March, 2015: 
Particulars Dr.(Rs.) Cr.(Rs.) 
          
                                                       
 
Machinery 50,000  
Additional Information: Depreciate Machinery @ 10% p.a. 
Solution: 
Dr. PROFIT AND LOSS ACCOUNT Cr.  BALANCE SHEET   
Particulars (Rs.) Particulars (Rs.) Liabilities (Rs.) Assets  (Rs.) 
To Depreciation Rs. 50,000 x 
10%) 
5,000     Machinery 50,000  
      Less: Depreciation 5,000 45,000 
 
Case 2 Following is the extract of Trial Balance as on 31
st
 December, 2015: 
Particulars Dr. (Rs.) Cr.(Rs.) 
Machinery 50,000  
Additional Information: Machinery includes a machinery purchased on 1
st
 July, 2015 for Rs. 20,000 Depreciate machinery 
@ 10% p.a. 
 
Solution: 
PROFIT AND LOSS ACCOUNT     BALANCE SHEET 
Particulars (Rs.) Particulars (Rs.) Liabilities (Rs.) Assets (Rs.) 
To Depreciation  4,000     Machinery 50,000  
      Less: Depreciation 4,000 46,000 
 
5. Accrued Income OR Income Due but not Received 
Accrued Income refer to an income, which has been earned during the accounting period, but has not yet received. 
 
• Adjustment Entry: The following Journal Entry is passed for accrued income: 
Accrued Income A/c Dr. 
To Income A/c 
 
• Accounting Treatment: 
Inside the Trial Balance- assets side of the Balance Sheet 
Outside the Trial Balance - assets side of the Balance Sheet 
   - added in the P&l a/c cr.side 
 
Case 1 
From the following extract of Trial Balance as on 31
st
 March, 2015,  
Particulars Dr (Rs.) Cr,(Rs.) 
Commission  5,000 
 
Additional information –  
Commission is recived for 10 months 
Commission is recievable @ Rs. 500 per month 
Accured commission Rs.1000 
Solution; 
PROFIT AND LOSS ACCOUNT     BALANCE SHEET 
Particulars  (Rs.) Particulars  (Rs.) Liabilities (Rs.) Assets (Rs.) 
   By 
Commission 
5,000     Accrued 
Commission 
1,000 
 
    Add: Accrued 
Commission 
1,000 6,000    
        
 
 
Implied interest 
Case 2 From the following extract of Trial Balance as on 31
st
 March, 2015,  
Particulars Dr.(Rs.) Cr.(Rs.) 
10% Fixed Deposits (on 1
s
'January, 2015) 20,000  
Interest on Fixed Deposits  300 
          
                                                       
 
 
Solution: 
PROFIT AND LOSS ACCOUNT     BALANCE SHEET 
Particulars  (Rs.) Particulars  Liabilities  (Rs.) Assets Rs. 
   By Interest 300     Accrued Interest 200 
   Add: Accrued       
   Interest  200 500      
 
6. Unearned Income OR Income Received in Advance 
Unearned Income refers to an income, which has been received in advance 
• Adjustment Entry: The following Journal Entry is passed for unearned income: 
Income A/c Dr. 
To Unearned Income A/c 
 
• Accounting Treatment 
inside the Trial Balance- the liability side of the Balance Sheet 
outside the Trial Balance- the liability side of the Balance Sheet 
   - deducted from the amount of concerned income in the Profit and Loss Account 
 
Case 1  From the following extract of Trial Balance as on 31
st
 March, 2015,  
Particulars Dr.(Rs.) Cr.(Rs.) 
Commission  3,000 
 
Additional information; 
Unearned commission Rs.1,000 
1/3 of the commission recived relates to the next year 
Solution: 
Dr. PROFIT AND LOSS ACCOUNT Cr. BALANCE SHEET  
Particulars (Rs.) Particulars (Rs.) Liabilities (Rs.) Assets (Rs.) 
  By Commission 3,000  Unearned 1,000   
  Less: Unearned  Commission    
  Commission 1,000 2,000     
 
7.  Interest on capital 
It a a nominal account and is an expense for the business as per business entity concept so it is debited  
• Adjustment Entry: 
Interest on capital dr.  
 To capital a/c  
 
• Accounting Treatment 
inside the Trial Balance- Profit and Loss Account Dr. side 
outside the Trial Balance- Profit and Loss Account Dr. side 
   - added in capital in the balance sheet liability side 
 
8.  Interest on Drawings 
It a a nominal account and is an income for the business as per business entity concept so it is credited 
• Adjustment Entry: 
 Drawings a/c dr.  
 To interest on drawings  a/c  
 
• Accounting Treatment 
inside the Trial Balance- Profit and Loss Account Cr. side 
outside the Trial Balance- Profit and Loss Account Cr. side 
   - deducted from capital in the balance sheet liability side 
 
9. Interest on loan 
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