Adjustments :: Outstanding/Prepaid Expenditure

Adjustments are nothing but transactions relating to the business which have not been journalised. Therefore, to deal w
adjustments one needs to understand the journal entry to be recorded if the transaction representing the adjustment is to
recorded in the books of accounts.

The adjustments relating to outstanding/prepaid expenses and pre-received/receivable incomes are dealt with here.

Outstanding Expenses
At the end of the accounting period, there may be expenses which have become due but have not yet been paid. If the organisation
following the mercantile system of accounting, these expenses are to be brought into account.
 Debit » Expenditure a/c

"Expenditure a/c" is a nominal account with a debit balance. The balance in the "Expenditure a/c" generally indicates the total amou
paid on account of the expenditure during the current accounting period.

To bring the expenditure that has not yet been brought into account into the books, the relevant expenditure account h
to be debite
[Expenditure a/c – Nominal a/c – Debit all Expenses and Losses.]

 Credit » Expenses Outstanding a/c

"Expenses Outstanding a/c" is a personal account with a credit balance. The balance in the "Expenses Outstanding a
indicates the amount that is owed by the organisation on account of the expenditure unpaid.

The amount of expenditure that has not yet been paid is a liability for the organisation. The persons to whom t
organisation owes is its creditor. As such, the amount of expenditure outstanding that has not yet been taken into t
books is credited to the "Expenditure Outstanding a/c
[Outstanding Expenditure a/c – Personal a/c – Credit the benefit giver.]

Journal in the books of M/s ____ for the period from 1st July 2005 to 30th June 2006
Credit
V/R Debit Amount
Date Particulars L/F Amount
No. (in Rs)
(in Rs)
1st to 30th – Expenditure a/c  Dr – xxx
      To Expenditure Outstanding a/c – xxx

[For the amount expenditure relating to the

current period, not yet paid brought in to the
books.]

Adjustment
The amount of expenditure outstanding is to be

1. Added to the relevant expenditure on the debit side of the "Trading a/" or "Profit & Loss a/c".
2. Shown as a liability on the liabilities side of the balance sheet.

Explanation/Illustration » Hide/Show

Expenses Prepaid
At the end of the accounting period, there may be expenses which have been paid in advance. These are expenses which are paid
advance and would be adjusted in the relevant expenditure during the subsequent accounting periods.

Advances paid are treated in a different manner from expenses prepaid, the difference 

being that the advances are recoverable whereas expenditure prepaid are realised by adjusted them in the amounts to be paid
the future towards the expenditure.

 Credit » Expenditure a/c

"Expenditure a/c" is a nominal account with a debit balance. The balance in the "Expenditure a/c" generally indicates t
total amount paid on account of the expenditure during the current accounting period.

On the assumption that the payments towards the expenditure include the expenditure prepaid, the expenditure has to
adjusted (reduced) to ascertain the actual expenditure chargeable for the current period.

"Expenditure a/c" shows a debit balance and as such to reduce it, the "Expenditure a/c" has to be credite
[Expenditure a/c – Nominal a/c – Credit all Incomes & Gains.]

 Debit » Expenses Prepaid a/c

The prepaid expenditure is indicative of an amount that is owed to the organisation by the person or organisation to who
it has been prepaid. The persons who owe to the organisation are its debtors.

Thus amount of expenditure prepaid is debited to the "Expenses Prepaid a/c

[Expenditure Prepaid a/c – Personal a/c – Debit the benefit receiver.]

Journal in the books of M/s ____ for the period from 1st July 2005 to 30th June 2006
Credit
V/R Debit Amount
Date Particulars L/F Amount
No. (in Rs)
(in Rs)
1st to 30th – Expenditure Prepaid a/c  Dr – xxx
      To Expenditure a/c – xxx

[For the amount expenditure relating to the

subsequent periods paid in advance being
adjusted from the current period expenditure.]

Adjustment
The amount of expenditure prepaid is to be

1. Deducted from the relevant expenditure on the debit side of the "Trading a/" or "Profit & Loss a/c".
2. Shown as an asset on the assets side of the balance sheet.

Explanation/Illustration » Hide/Show

Trial Balance of M/s ___ as on 1st Jan 2005

Debit Credit
L/
Particulars Amount Amount
F
(in Rs) (in Rs)

Expenditure a/c –
 –
Expenditure Prepaid a/c 8,000

Total      
The "Expenditure a/c" being a nominal account is created anew in every accounting period. Thus it has no balance on the
opening day of the accounting period.

 Cash paid towards the expenditure 

» Rs. 86,000 (includes Rs. 6,000 pre paid)

Method I :: "Expenditure Prepaid a/c" exists all through out

This method of treating prepaid expenditure is not possible since the prepaid expenditure is not realised in cash and is adjusted
to the relevant expenditure only.

Method II :: "Expenditure Prepaid a/c" is raised and written off

The "Expenditure Prepaid a/c" is created at the end of the accounting period and is written off by transfer to the "Expenditure
a/c" at the beginning of the accounting period.
Trial Balance of M/s ___ as on 1st Jan 2005

Debit Credit
L/
Particulars Amount Amount
F
(in Rs) (in Rs)

Expenditure a/c –

Expenditure Prepaid a/c – 8,000

Total      
The balance in the "Expenditure Prepaid a/c" at the beginning of the accounting period represents the expenditure prepaid at
the end of the previous period brought forward. This balance is transferred to the "Expenditure a/c" at the beginning of the
accounting period.

Dr Expenditure Prepaid a/c Cr

Amount Amount
Date Particulars J/F Date Particulars J/F
(in Rs) (in Rs)
01/01/05 To Bal b/d – 8,000 01/01/05 By Expenditure a/c – 8,000
      8,000       8,000
               
The amount that is paid during the current period, whether towards the current period dues or for the subsequent period is
recorded through the "Expenditure a/c".

Journal in the books of M/s ____ for the period from 1st Jan 2005 to 31st Dec 2005
Credit
V/R Debit Amount
Date Particulars L/F Amount
No. (in Rs)
(in Rs)
1st to 31st – Expenditure a/c  Dr – 86,000
      To Cash/Bank a/c – 86,000
 [For the amount paid towards the expenditure
relating to the current period as well as the
expenditure prepaid.]
Dr Expenditure a/c Cr
Amount Amount
Date Particulars J/F Date Particulars J/F
(in Rs) (in Rs)
01/01/0 To Exp. Prep. a/c – 8,000 31/12/0 By Bal c/d – 94,000
5 To Cash/Bank a/c – 86,000 5
1st-31st
      94,000       94,000
31/12/0
To bal b/d – 94,000        
5

Trial Balance of M/s ___ as on 31st Dec 2005

Debit Credit
L/
Particulars Amount Amount
F
(in Rs) (in Rs)

Expenditure a/c – 94,000

Expenditure Prepaid a/c – –

Total      
The "Expenditure Prepaid a/c" does not carry any balance till the entry for recording the total expenditure prepaid is recorded at
the end of the accounting period.

Journal in the books of M/s ____ for the period from 1st Jan 2005 to 31st Dec 2005
Credit
V/R Debit Amount
Date Particulars L/F Amount
No. (in Rs)
(in Rs)
31/12/05 – Expenditure Prepaid a/c  Dr – 6,000
      To Expenditure a/c – 6,000

[For the amount expenditure prepaid at the end

of the accounting period.]
Dr Expenditure a/c Cr
Amount Amount
Date Particulars J/F Date Particulars J/F
(in Rs) (in Rs)
31/12/0 To Bal b/d – 94,000 31/12/0 By Exp. Prep. a/c – 6,000
5 5 By P/L a/c – 88,000
31/12/0
5
      94,000       94,000
               
Dr Expenditure Prepaid a/c Cr
Amount Amount
Date Particulars J/F Date Particulars J/F
(in Rs) (in Rs)
31/12/05 To Expenditure a/c – 6,000 31/12/0 By Bal c/d – 6,000
5
       6,000       6,000
31/12/05 To Bal b/d – 6,000        
Dr Trading and Profit & Loss a/c Cr
Amount Amount Amount Amount
Particulars Particulars
(in Rs) (in Rs) (in Rs) (in Rs)
 
Expenditure 88,000

           

Balance Sheet of M/s ______ as on 31st Dec 2005

Liabilities Amount Amount Assets Amount Amount

Expenditure Prepaid 6,000

           
Method II (alternative): Using Only "Expenditure a/c"
The prepaid expenditure is shown as a balance in the "Expenditure a/c" itself, thereby treating the "Expenditure a/c" as a
personal account for the purpose of making up the balance sheet. The "Expenditure a/c" appearing in the Balance Sheet is a
personal account and for all other purposes it is a nominal account.
Trial Balance of M/s ___ as on 1st Jan 2005

Debit Credit
L/
Particulars Amount Amount
F
(in Rs) (in Rs)

Expenditure a/c – 8,000

Total      
The "Expenditure a/c" is a personal account for the purpose of preparation of the opening balance sheet and is treated a
nominal account all throughout the accounting period.

Thus, the debit balance shown in the account on the opening day is indicative of a prepaid expenditure at the end of the
previous period.

Dr Expenditure a/c Cr
Amount Amount
Date Particulars J/F Date Particulars J/F
(in Rs) (in Rs)
01/01/0 To Bal b/d – 8,000 31/12/0 By P/L a/c – 88,000
5 To Cash/Bank a/c – 84,000 5 By Bal c/d – 6,000
1st-31st
      94,000       94,000
01/01/0
To bal b/d – 6,000        
6
The closing debit balance in the "Expenditure a/c" indicates the total expenditure pre-paid at the end of the accounting
period. Even in this case, the total amount paid during the current period is to be treated as paid for the expenditure
(without segregating between payment for the current period and payment for the subsequent periods.)

The postings in the "Trading a/c" or "Profit and Loss a/c" would be the same as above with the only difference being in the
name of the account head that is shown in the balance sheet. "Expenditure a/c" would appear in the balance sheet instead of
the "Expenditure Prepaid a/c".

Adjustment during Final Accounting

Adjustment is bringing in the effect of the transactions through mathematical operations of addition and subtraction. The
adjustments to be made can be found out by ascertained the net effect of the journal entries to be recorded.

Adjustments are generally required for transactions which are not yet recorded at the time of making up the final accounts i.e.
towards the end of the accounting period.

For the prepaid expenditure to be recorded at the end of the accounting period.

Regular Entries Net Effect

1) Expenditure Prepaid a/c   Dr 

      To Expenditure a/c
Expenditure Prepaid a/c   Dr 
2) Expenditure a/c   Dr      To Trading a/c (Or) Profit & Loss a/c
      To Trading a/c (Or) Profit & Loss
a/c

The net effect would give an understanding on where the amounts are to be adjusted.

The amount of expenditure prepaid at the end of the accounting period is to be

1. deducted from the relevant expenditure on the debit side of the "Trading a/" or "Profit & Loss a/c".
2. Shown as an asset on the assets side of the balance sheet.

Dr Trading and Profit & Loss a/c Cr

Amount Amount Amount Amount
Particulars Particulars
(in Rs) (in Rs) (in Rs) (in Rs)

Expenditure 94,000
  (−) Pre paid (cl).   6,000
Total Exp 88,000

           

Balance Sheet of M/s ______ as on 31st Dec 2005

Liabilities Amount Amount Assets Amount Amount

     
Expenditure Prepaid 6,000
 

           
Adjustments :: Prereceived/Receivable Income

 
 
 

Adjustments are nothing but transactions relating to the business which have not been journalised. Therefore, to deal w
adjustments one needs to understand the journal entry to be recorded if the transaction representing the adjustment is to
recorded in the books of accounts.

The adjustments relating to prereceived/receivable incomes are dealt with here.

Incomes Receivable
At the end of the accounting period, there may be incomes which have become due but have not yet been received. If the organisti
is following the mercantile system of accounting, these incomes are to be brought into account.
 Credit » Income a/c

"Income a/c" is a nominal account with a credit balance. The balance in the "Income a/c" generally indicates the to
amount received on account of the income during the current accounting period.

To bring the income that has not yet been brought into account into the books, the relevant income account has to
credited. 
[Income a/c – Nominal a/c – Credit all Incomes and Gains.]

 Debit » Income Receivable a/c

The income receivable is indicative of an amount that is owed to the organisation by a person or organisation. The perso
who owe to the organisation are its debtors.

Thus amount of income receivable is debited to the "Income Receivable a/c

[Income Receivable a/c – Personal a/c – Debit the benefit receiver.]

Journal in the books of M/s ____ for the period from 1st April 2005 to 31st March 2006
Credit
V/R Debit Amount
Date Particulars L/F Amount
No. (in Rs)
(in Rs)
1st to 30th – Income Receivable a/c  Dr – xxx
      To Income a/c – xxx
 [For the amount income relating to the current
period, not yet received brought into the
books.]

Adjustment
The amount of income receivable is to be

1. Added to the relevant income on the credit side of the "Trading a/" or "Profit & Loss a/c".
2. Shown as an asset on the assets side of the balance sheet.

Explanation/Illustration » Hide/Show

Income Prereceived
At the end of the accounting period, there may be incomes which have been received in advance. These are incomes which a
received in advance and would have to be adjusted in the relevant income during the subsequent accounting periods.

Advances received are treated in a different manner from incomes prereceived, the difference being that the advances are repayab
whereas incomes prereceived are liquidated by adjusting them in the amounts to be received in the future towards the income.

 Debit » Income a/c

"Income a/c" is a nominal account with a credit balance. The balance in the "Income a/c" generally indicates the to
amount received on account of the income during the current accounting period.

On the assumption that the receipts towards the income include the income prereceived, the income has to be adjust
(reduced) to ascertain the actual income that can be considered for the current period.

"Income a/c" shows a credit balance and as such to reduce it, the "Income a/c" has to be debite
[Income a/c – Nominal a/c – Debit the benefit receiver.]

 Credit » Income Prereceived a/c

The income prereceived is indicative of an amount that is owed by the organisation to another person or organisation. T
persons to whom the organisation owes are its creditors.

Thus amount of income prerecieved is credited to the "Income Prereceived a/c

[Income Prereceived a/c – Personal a/c – Credit the benefit giver.]

Journal in the books of M/s ____ for the period from 1st April 2005 to 31st March 2006
Credit
V/R Debit Amount
Date Particulars L/F Amount
No. (in Rs)
(in Rs)
1st to 31st – Income a/c  Dr – xxx
      To Income Prereceived a/c – xxx

[For the amount income relating to the

subsequent periods received in advance being
adjusted from the current period income.]

Adjustment
The amount of income prereceived is to be

1. Deducted from the relevant income on the credit side of the "Trading a/" or "Profit & Loss a/c".
 2. Shown as a liability on the liabilities side of the balance sheet.

Explanation/Illustration » Hide/Show

Trial Balance of M/s ___ as on 1st April 2005

Debit Credit
L/
Particulars Amount Amount
F
(in Rs) (in Rs)

Income a/c –
–
Income Prereceived a/c 4,300

Total      
The "Income a/c" being a nominal account is created anew in every accounting period. Thus it has no balance on the opening
day of the accounting period.

 Cash received towards the income 

» Rs. 58,000 (includes Rs. 2,800 pre received)

Method I :: "Income Prereceived a/c" exists all throughout

This method of treating prereceived incomes is not possible since the prereceived income is not paid out in cash and is adjusted
to the relevant income only.

Method II :: "Income Prereceived a/c" is raised and written off

The "Income Prereceived a/c" is created at the end of the accounting period and is written off by transfer to the "Income a/c" at
the beginning of the accounting period.
Trial Balance of M/s ___ as on 1st April 2005

Debit Credit
L/
Particulars Amount Amount
F
(in Rs) (in Rs)

Income a/c –

Income Prereceived a/c – 4,300

Total      
The balance in the "Income Prereceived a/c" at the beginning of the accounting period represents the prereceived income at the
end of the previous period brought forward. This balance is transfered to the "Income a/c" at the beginning of the accounting
period.

Dr Income Prereceived a/c Cr

Amount Amount
Date Particulars J/F Date Particulars J/F
(in Rs) (in Rs)
01/04/0 To Income a/c – 4,300 01/04/0 By Bal b/d – 4,300
5 5
       4,300       4,300
               
The amount that is received during the current period, whether towards the current period dues or for the subsequent period is
recorded through the "Income a/c".

Journal in the books of M/s ____ for the period from 1st April 2005 to 31st March 2006
Credit
V/R Debit Amount
Date Particulars L/F Amount
No. (in Rs)
(in Rs)
1st to 31st – Cash'/Bank a/c  Dr – 58,000
      To Income a/c – 58,000

[For the amount received towards the income

relating to the current period as well as the
income prereceived.]
Dr Income a/c Cr
Amount Amount
Date Particulars J/F Date Particulars J/F
(in Rs) (in Rs)
31/03/0 To Bal c/d – 62,300 01/04/0 By Inc. Pre. a/c – 4,300
5 5 By Cash/Bank a/c – 58,000
1st-31st
      62,300       62,300
31/03/0
        By bal b/d – 62,300
6

Trial Balance of M/s ___ as on 31st March 2006

Debit Credit
L/
Particulars Amount Amount
F
(in Rs) (in Rs)

Income a/c – 62,300

Income Prereceived a/c – –

Total      
The "Income Prereceived a/c" does not carry any balance till the entry for recording the total income prereceived is recorded at
the end of the accounting period.

Journal in the books of M/s ____ for the period from 1st April 2005 to 31st March 2006
Credit
V/R Debit Amount
Date Particulars L/F Amount
No. (in Rs)
(in Rs)
31/03/06 – Income a/c  Dr – 2,800
      To Income Prereceived a/c – 2,800

[For the amount expenditure prepaid at the end

of the accounting period.]
Dr Income a/c Cr
Date Particulars J/F Amount Date Particulars J/F Amount
 (in Rs) (in Rs)
31/03/0 To Inc. Pre recd. a/c – 2,800 31/03/0 By Bal b/d – 62,300
6 To P/L a/c 59,500 6 –
31/03/0
6
      62,300       62,300
               
Dr Income Pre Received a/c Cr
Amount Amount
Date Particulars J/F Date Particulars J/F
(in Rs) (in Rs)
31/12/0 To Bal c/d – 2,800 31/12/0 By Income a/c – 2,800
5 5
      2,800       2,800
31/03/0
        By Bal b/d – 2,800
6
Dr Trading and Profit & Loss a/c Cr
Amount Amount Amount Amount
Particulars Particulars
(in Rs) (in Rs) (in Rs) (in Rs)
 
Income 59,500

           

Balance Sheet of M/s ______ as on 31st Dec 2005

Liabilities Amount Amount Assets Amount Amount

Income Pre received 2,800

           
Method II (alternative): Using Only "Income a/c"
The prereceived income is shown as a balance in the "Income a/c" itself, thereby treating the "Income a/c" as a personal
account for the purpose of making up the balance sheet. The "Income a/c" appearing in the Balance Sheet is a personal account
and for all other purposes it is a nominal account.
Trial Balance of M/s ___ as on 1st April 2005

Debit Credit
L/
Particulars Amount Amount
F
(in Rs) (in Rs)

Income a/c – 4,300

Total      
The "Income a/c" is a personal account for the purpose of preparation of the opening balance sheet and is treated a nominal
account all througout the accounting period.

Thus, the credit balance shown in the account on the opening day is indicative of a prereceived income at the end of the
previous period.
 Dr Income a/c Cr
Amount Amount
Date Particulars J/F Date Particulars J/F
(in Rs) (in Rs)
31/03/0 To P/L a/c – 59,500 01/04/0 By Bal b/d – 4,300
6 To Bal c/d – 2,800 5 By Cash/Bank a/c – 58,000
1st-31st
      62,300       62,300
01/04/0
        By bal b/d – 2,800
6
The closing debit balance in the "Income a/c" indicates the total income prereceived at the end of the accounting period. Even in
this case, the total amount received during the current period is to be treated as having been received for the income (without
seggregating between receipt for the current period and receipt for the subsequent periods.)

The postings in the "Trading a/c" or "Profit and Loss a/c" would be the same as above with the only difference being in the
name of the account head that is shown in the balance sheet. "Income a/c" would appear in the balance sheet instead of the
"Income Prereceived a/c".

Adjustment during Final Accounting

Adjustment is bringing in the effect of the transactions through mathematical operations of addition and subtraction. The
adjustments to be made can be found out by ascertained the net effect of the journal entries to be recorded.

Adjustments are generally required for transactions which are not yet recorded at the time of making up the final accounts i.e.
towards the end of the accounting period.

For the prereceived income to be recorded at the end of the accounting period.

Regular Entries Net Effect

1) Income a/c   Dr 

      To Income Prereceived a/c
Trading a/c (Or) Profit & Loss a/c   Dr 
2) Trading a/c (Or) Profit & Loss a/c       To Income Prereceived a/c
Dr 
      To Income a/c

The net effect would give an understanding on where the amounts are to be adjusted.

The amount of income prereceived at the end of the accounting period is to be

1. deducted from the relevant income on the credit side of the "Trading a/" or "Profit & Loss a/c".
2. Shown as a liability on the liabilities side of the balance sheet.

Dr Trading and Profit & Loss a/c Cr

Amount Amount Amount Amount
Particulars Particulars
(in Rs) (in Rs) (in Rs) (in Rs)

Income 62,300
  (−) Pre Recd (cl).   2,800
Total Income 59,500

           
 Balance Sheet of M/s ______ as on 31st March 2006

Liabilities Amount Amount Assets Amount Amount

     
Income Prereceived 2,800
 

           

Drawings of Stock/Goods, withdrawn for Personal use

 
 
 

Drawings of stock implies the Stock/Goods taken away by the proprietor or the partner for personal purposes. These
goods are to be valued at cost and not at their selling prices.

Recording » Journal Entry

We know that ledgers provide the information we need in accounting and anything that gets into the ledger should be
through the journal. Even this forms a transaction that should be recorded through the journal.
 Debit » Drawings a/c

The value of goods taken away being drawings has to be debited to the "Drawings a/c" which represents
the owner of the business. 
[Drawings a/c – Personal a/c – Debit the benefit receiver.]

 Credit »
 The value of goods withdrawn by the proprietor represents the value of stock that has not been used for
trading purposes. To reveal the cost of goods sold, the value of stock unused for trading activity is to be
deducted from the total value of goods.

For this the following ledger account would be credited depending on the time of recording the transaction,
what comprises the value of stock drawn and the account in which the related value exists at the time of
recording the entry.

o Trading a/c

Generally, at the end of the accounting period, the balances (amounts) in all the ledger accounts
which go into the value of goods/stock, are closed by transfer to the "Trading a/c". This amounts
to debiting the "Trading a/c" with the total value of goods/stock.

Thus the value of stock drawings has to be credited to the "Trading a/c" in which the total value
of goods/stock is existing as a debit balance.

Journal/Ledger » Hide/Show
o Goods Consumed a/c

Where the "Goods Consumed a/c" is used, the balances (amounts) in all the ledger accounts
which go into the value of goods/stock (including opening stock) are transferred to it. Thus the
"Goods Consumed a/c" would hold the total value of stock (as a debit balance).

Thus the value of stock drawings has to be credited to the "Goods Consumed a/c" in which the
total value of goods/stock is existing as a debit balance.

Journal/Ledger » Hide/Show
o Purchases a/c

Where the following conditions exist, we can credit "Purchases a/c" with the value of stock
drawings.

 The stock drawn is physically relatable to the stock that has been purchased during the
current period.
 There are no direct expenses in relation to the stock purchased during the current period 
(Or) 
The value of stock drawn does not include the direct expenses incurred during the
current period

Journal/Ledger » Hide/Show
o Stock Drawings a/c

Where such transactions occur frequently, the organisation may create a controlling account by
name "Stock Drawings a/c". This is a nominal account that gives the information relating to the
total value of stock withdrawn by the proprietor or all the partners during the accounting period.

Journal/Ledger » Hide/Show

The "Drawings a/c" is a personal account intended to give the information relating to the drawings made by the
proprietor separate from the capital account. This account may be closed by transfer to the "Capital a/c" at the end
of the accounting period, whereby the account is created anew every year. Alternatively, it may be carried forward to
the subsequent periods just like any other personal account.

When the "Drawings a/c" is carried forward, it should be shown on the assets side of the balance sheet (as it has a
debit balance). However, it shown as a deduction from its related account, the "Capital a/c" on the liabilities side of
the balance sheet.

Balance Sheet of M/s ______ as on 30th June 2006

Liabilities Amount Amount Assets Amount Amount

Capital xx    
   (+)Net Profit   xx xxx Drawings 28,000

           
However, to derive the information relating to the net amount relating to the proprietor within the organisation, it is
shown as a deduction from its related account, the "Capital a/c", on the liabilities side of the balance sheet.

Balance Sheet of M/s ______ as on 30th June 2006

Liabilities Amount Amount Assets Amount Amount

   
Capital xx
   (+)Net Profit xx
   (−)Drawings   28,000 xx

           
Adjustment during Final Accounting
Adjustment is bringing in the effect of the transactions through mathematical operations of addition and subtraction.
The adjustments to be made can be found out by ascertained the net effect of the journal entries to be recorded.

Adjustments are generally required for transactions which are not yet recorded at the time of making up the final
accounts i.e. towards the end of the accounting period.

Regular Entries Net Effect

1) Drawings a/c  
Dr 
      To Trading a/c Capital a/c   Dr 
    To Trading a/c
2) Capital a/c   Dr 
      To Drawings a/c

Since adjustment is needed at the end of the accounting period, we assume that the journal entry to record the
drawings of stock is 
Dr. Drawings a/c 
Cr. Trading a/c

The net effect would give an understanding on where the amounts are to be adjusted.

The value of stock withdrawn is to be

1. Credited to the "Trading a/c" 

It is generally shown as a deduction from purchases on the debit side of the "Trading a/"
 2. Deducted from Capital on the liabilities side of the balance sheet (as additional drawings)

Dr Trading a/c Cr
Amount Amount Amount Amount
Particulars Particulars
(in Rs) (in Rs) (in Rs) (in Rs)

To Purchases 8,48,000
    (−) Drawings   28,000 8,20,000

           

Balance Sheet of M/s ______ as on 30th June 2006

Liabilities Amount Amount Assets Amount Amount

   
Capital xx
   (+)Net Profit xx
   (−)Drawings xx
   (−)Stock Draw   28,000 xx

           
The stock that is used by the proprietor or the owner for personal purposes represents the stock that is used within
the organisation. This is because the organisation and owners are treated one and the same for the purpose of
identifying transactions that generate income. As such the drawings of stock have to be valued at cost based on the
principle that "one cannot make a profit out of a transaction with one self".

Stock/Goods used in the Construction of an Asset

Stocks that the organisation deals with may be used in the process of building up an asset. Say, for example a trader who
is trading in Rose Wood may use some wood for getting office furniture made up.

These goods are to be valued at cost and not at their selling prices.

Recording » Journal Entry

We know that ledgers provide the information we need in accounting and anything that gets into the ledger should be through
the journal. Even this forms a transaction that should be recorded through the journal.
 Debit » Asset a/c

Based on the principle for valuation of an asset, all the expenses incurred before bringing the asset into usable
 condition are to form part of the value of the asset.

Thus the value of goods used in the construction of the asset would be debited to the relevant "Asset a/c". 
[Asset a/c – Real a/c – Debit what comes in.]

 Credit »

The value of goods used in the construction of the asset represents the value of goods/stock that has not been
used for trading purposes. To reveal the cost of goods sold, the value of stock unused for trading activity is to be
deducted from the total value of goods.

For this the following ledger account would be credited depending on the time of recording the transaction, what
comprises the value of stock drawn and the account in which the related value exists at the time of recording the
entry.

o Trading a/c

Generally, at the end of the accounting period, the balances (amounts) in all the ledger accounts which go
into the value of goods/stock, are closed by transfer to the "Trading a/c". This amounts to debiting the
"Trading a/c" with the total value of goods/stock.

Thus the value of stock used in the construction of the asset has to be credited to the "Trading a/c" in
which the total value of goods/stock is existing as a debit balance.

Journal/Ledger » Hide/Show
o Goods Consumed a/c

Where the "Goods Consumed a/c" is used, the balances (amounts) in all the ledger accounts which go into
the value of goods/stock (including opening stock) are transferred to it. Thus the "Goods Consumed a/c"
would hold the total value of stock (as a debit balance).

Thus the value of stock used in the construction of assets has to be credited to the "Goods Consumed a/c"
in which the total value of goods/stock is existing as a debit balance.

Journal/Ledger » Hide/Show
o Purchases a/c

Where the following conditions exist, we can credit "Purchases a/c" with the value of stock used in the construction of an
asset.

The stock used in the construction of the assets is physically relatable to the stock that has been
purchased during the current period.
There are no direct expenses in relation to the stock purchased during the current period 
(Or) 
The value of stock used in the construction of the assets does not include the direct expenses incurred during the current
period

Journal/Ledger » Hide/Show
o Stock used for Assets a/c

Where such transactions occur frequently, the organisation may create a controlling account by name "Stock used for Assets
a/c". This is a nominal account that gives the information relating to the total value of stock used in construction of assets
 during the accounting period.

Journal/Ledger » Hide/Show

Caution in calculating Depreciation

Where there are adjustments which influence the value of the assets which are to be depreciated, proper attention should be
paid on the date of the transaction.

The value of goods/stock enters the value of the asset on the date on which the transaction takes place. This is on the
assumption that the asset is brought into use on the same date (the date from which it is to be depreciated).

 Depreciated for Specific Period

Where the transaction takes place on a specific date, the value of the asset built up by the value of stock should be
depreciated for the relevant period.

Illustration » Hide/Show

 Depreciated for Full Period

Where the transaction takes place towards the beginning of the accounting period, the value of the asset built up by the value
of stock should be depreciated for the complete accounting period.

Illustration » Hide/Show

 Not Depreciated

Where the transaction takes place towards the end of the accounting period, the value of the asset built up by the value of
stock should not be depreciated during the accounting period.

Illustration » Hide/Show

Note

1. Where there is no specific indication with regard to the date of the transaction, it may be assumed to have taken
place
Towards the beginning of the accounting period, when the asset value has to be depreciated in full
o Towards the end of the accounting period, when the asset value should not be depreciated

o Somewhere in between the accounting period, when the asset value is depreciated for a period equal to
half the accounting period.
2. Generally such transactions relating to adjustments to be made in relation to the stock used are recorded towards
the end of the accounting period mostly at the time of making up the final accounts. Thus the date of recording the
transaction may not be the date on which the asset has been brought into use. This is to be noted when we need to
calculate depreciation based on the time of usage of the asset.

Adjustment during Final Accounting

Adjustment is bringing in the effect of the transactions through mathematical operations of addition and subtraction. The
adjustments to be made can be found out by ascertained the net effect of the journal entries to be recorded.

Adjustments are generally required for transactions which are not yet recorded at the time of making up the final accounts
i.e. towards the end of the accounting period.

Regular Entries Net Effect

1) Assets a/c   Dr  Asset a/c   Dr 

      To Trading a/c     To Trading a/c

Since adjustment is needed at the end of the accounting period, we assume that the journal entry to record the usage of
stock in the construction of an asset is 
Dr. Assets a/c 
Cr. Trading a/c

The net effect would give an understanding on where the amounts are to be adjusted.

The value of stock used in the building up of the asset is to be

1. Credited to the "Trading a/c" 

It is generally shown as a deduction from purchases on the debit side of the "Trading a/"
2. Added to the relevant value of the asset on the assets side of the balance sheet

Dr Trading a/c Cr
Amount Amount Amount Amount
Particulars Particulars
(in Rs) (in Rs) (in Rs) (in Rs)

To Purchases 15,75,000
    (−) Stock (asset)  1,40,000 14,35,000

           

Balance Sheet of M/s ______ as on 30th June 2006

Liabilities Amount Amount Assets Amount Amount

   
Asset xx
   (+)Stock Used 1,40,000
   (−)Depreciation     xx xx

           
The stock that is used in the construction of an asset represents the stock that is used within the organisation. This is because
the asset so built is also owned by the organisation. As such the drawings of stock have to be valued at cost based on the
principle that "one cannot make a profit out of a transaction with one self".

Abnormal Loss :: Accounting Treatment & Adjustments

Stocks that the organisation deals with may be lost on account of abnormal reasons. Abnormal loss stocks are to be valued at cost.

The principles that are used in the valuation of assets are used even in the case of valuing abnormal loss stocks.

Recording » Journal Entry

We know that ledgers provide the information we need in accounting and anything that gets into the ledger should be through t
journal. Even this forms a transaction that should be recorded through the journal.
 Debit » Asset a/c
The value of abnormal loss stock represents a temporary asset. The organisation would make efforts to realise this asset in a
number of different ways like selling the salvaged stock, insurance realisation etc.

Thus a temporary asset account by name "Abnormal Loss Stock a/c" is created and used for this purpos
[Abnormal Loss Stock a/c – Real a/c – Debit what comes in.]

Many a times we use the words "Abnormal Loss a/c" and consider it a nominal account which is also an accepted practic
We assume it to be a real account to enable an easier understanding of the transactions involving abnormal loss stocks.

Some times a name that indicates the reason for the loss (like Stock Lost by Fire Accident) is preferred in place of
general name like "Abnormal Loss". Whatever may be the name we give it and the nature we attribute to the account, it
a temporary account.

 Credit »

The value of abnormal loss stock represents the value of goods/stock that has not been used for trading purposes.
reveal the cost of goods sold, the value of stock unused for trading activity is to be deducted from the total value of good

For this the following ledger account would be credited depending on the time of recording the transaction, what compris
the value of stock drawn and the account in which the related value exists at the time of recording the entry.

o Trading a/c

Generally, at the end of the accounting period, the balances (amounts) in all the ledger accounts which go into t
value of goods/stock, are closed by transfer to the "Trading a/c". This amounts to debiting the "Trading a/c" w
the total value of goods/stock.

Thus the value of abnormal loss stock has to be credited to the "Trading a/c" in which the total value
goods/stock is existing as a debit balance.

Journal/Ledger » Hide/Show
o Goods Consumed a/c

Where the "Goods Consumed a/c" is used, the balances (amounts) in all the ledger accounts which go into t
value of goods/stock (including opening stock) are transferred to it. Thus the "Goods Consumed a/c" would ho
the total value of stock (as a debit balance).

Thus the value of abnormal loss stock has to be credited to the "Goods Consumed a/c" in which the total value
goods/stock is existing as a debit balance.

Journal/Ledger » Hide/Show
o Purchases a/c

Where the following conditions exist, we can credit "Purchases a/c" with the value of abnormal loss stock.

 The stock lost on account of abnormal reasons is physically relatable to the stock that has been purchas
during the current period.
 There are no direct expenses in relation to the stock purchased during the current perio
(Or) 
 The value of abnormal loss stock does not include the direct expenses incurred during the current perio

Journal/Ledger » Hide/Show
o Stock Losses (Abnormal)

Where such transactions occur frequently, the organisation may create a controlling account by name "Stock Lo
a/c". This is a nominal account that gives the information relating to the total value of stock that has been lost
account of abnormal reasons during the accounting period.

Journal/Ledger » Hide/Show

Disposing Abnormal Loss Stock

We will come across the following additional transactions relating to disposal of abnormal loss stock
 Expenses Incurred » Journal/Ledger :: Hide/Show

The salvaged stock may be in a saleable condition or completely useless. There may be instances when the salvaged sto
can be brought into saleable condition by bearing certain expenditure.

 Sale Realisation » Journal/Ledger :: Hide/Show

The salvaged stock may be directly sold (if in a saleable condition) or after getting them repaired or refurbished.

 Insurance Realisation » Journal/Ledger :: Hide/Show

Where the stock has been insured with one or more insurance companies, the insurance company would pay the amount
compensation based on the contract of insurance.

The contract of insurance being a contract of indemnity, the total amount of compensation received from all the insuran
companies together would be not more than the total loss incurred.

 Commission on Sale

Where there is a commission being paid or payable on the sale of abnormal loss stock it may be

o Deducted from the sale proceeds received/receivable and only the net proceeds may be brought into account
o Recorded just like any other expenditure that goes into the value of the Abnormal Loss Stock

 Profit/Loss on Disposal » Journal/Ledger :: Hide/Show

The "Abnormal Loss Stock a/c" may carry a balance after having sold the salvaged stock and realising the insuran
amount.

If there is a debit balance it represents the amount of asset value that is unrealisable and as such a loss.

Though, it is a very rare occurrence, the "Abnormal Loss Stock a/c" may carry a credit balance which indicates that t
asset has realised at a value greater than the actual asset value, thereby resulting in a profit.

Whether there is a profit or a loss, it is of abnormal nature since it is related to "Abnormal Loss Stock a/c". The profit
loss is transferred to the "Profit & Loss a/c" thereby closing the "Abnormal Loss Stock a/c".

Adjustment during Final Accounting

Adjustment is bringing in the effect of the transactions through mathematical operations of addition and subtraction. The adjustmen
to be made can be found out by ascertained the net effect of the journal entries to be recorded.

Adjustments are generally required for transactions which are not yet recorded at the time of making up the final accounts i
towards the end of the accounting period.

Regular Entries Net Effect

1) Abnormal Loss Stock a/c   Dr 

      To Trading a/c

2) Abnormal Loss Stock a/c   Dr 

      To Expenses Outstanding
a/c
Insurance Company a/c   Dr 
Proceeds Receivable a/c   Dr 
3) Insurance Company a/c   Dr  Profit and Loss a/c   Dr 
      To Abnormal Loss Stock a/c     To Trading a/c 
    To Expenses Outstanding a/c
4) Proceeds Receivable a/c   Dr 
      To Abnormal Loss Stock a/c

5) Profit and Loss a/c   Dr 

      To Abnormal Loss Stock a/c

Note
Since adjustment is needed at the end of the accounting period, we assume that the proceeds are receivable, expenses are payab
and insurance amount is receivable where the information relating to them is to be incorporated into the accounts.

The net effect would give an understanding on where the amounts are to be adjusted. Since the journal entry representing the n
effect is a compound entry, the number of accounts affected, thereby the number of adjustments to be made , can be identified
the number of accounts involved in the compound entry.

The value of stock used in the building up of the asset is to be

1. The value of stock lost should be credited to the "Trading a/c"

2. The net profit or loss on disposing the abnormal loss stock should be transferred to the "Profit & Loss a/c"
o Where there is no realisation either in the form of sale proceeds of salvaged stock or insurance realisation, the to
value of stock lost (value of stock + expenses incurred) would be a loss.
o Where there is sale or insurance realisation or both the total value realised is reduced by the total amount
realisation giving us the net amount of loss.
o Where there is sale or insurance realisation or both, if the total value realised is more than the total value of t
stock there would be a gain. [This is a very rare occurrence.]

Abnormal Loss Stock » Statement to ascertain Loss/Gain Hide/Show

3. The amount of expense payable outstanding if any relating to the abnormal loss stock has to be shown as a liability on t
liabilities side of the balance sheet.
4. The amount of sale proceeds receivable if any relating to the abnormal loss stock has to be shown as an asset on the asse
side of the balance sheet.
5. The insurance amount receivable if any relating to the abnormal loss stock has to be shown as an asset on the assets side
the balance sheet.

Dr Trading and Profit & Loss a/c Cr

Amount Amount Amount Amount
Particulars Particulars
(in Rs) (in Rs) (in Rs) (in Rs)
 By Abnormal Loss 24,000

           

To Abnormal Loss Stock 12,200

           

Balance Sheet of M/s ______ as on 30th June 2006

Liabilities Amount Amount Assets Amount Amount

 
Realisation Receivable 2,900
Expenditure Outstanding 1,200
Insurance Company 2,500

           
Using Temporary Accounts
Recording the value of stock lost on account of abnormal reasons would result in the "Abnormal Loss Stock a/c" or an account by a
relevant name being created. The "Abnormal Loss Stock a/c" would be used in recording the transactions relating to expenses
on the stock, sale realisations, insurance realisation etc., if the entries are being recorded subsequent to recording this
transaction.

However, where the journal entry for recording the value of abnormal loss stock has not yet been recorded, the "Abnormal Loss Sto
a/c" would not be found in the books of accounts. In such cases, where the accountant is confused about which account to use som
temporary account by relevant name would be used to complete recording the transaction.

In such cases, care should be taken to ensure that these temporary accounts are cleared by using them in recording the entr
relating to abnormal loss stock. These can be identified by their presence in the "Trial Balance".

 For Expenses Paid

When expenses are paid, a temporary account, say by name "Expenses on Abnormal Loss Stock a/c" may be used
record the expenditure incurred. If such an account is used, it would appear in the "Trial Balance".

This has to be closed by absorbing the expenditure to the "Abnormal Loss Stock a/c".

Journal » Hide/Show
 For Sale Realisation

When sale proceeds are received, a temporary account, say by name "Sale of Abnormal Loss Stock a/c" may be used
record the proceeds received/receivable. If such an account is used, it would appear in the "Trial Balance".

This has to be closed by absorbing the proceeds to the "Abnormal Loss Stock a/c".

Journal » Hide/Show
 For Insurance Realisation

When insurance realisation is received, a temporary account, say by name "Insurance received a/c" may be used to reo
the amount received/receivable. If such an account is used, it would appear in the "Trial Balance"
 This has to be closed by absorbing the proceeds to the "Abnormal Loss Stock a/c".

Journal

Journal in the books of M/s __ for the period from ____ to _____
Credit
V/R Debit Amount
Date Particulars L/F Amount
No. (in Rs)
(in Rs)
Dec 31st – Cash/Bank a/c  Dr – 5,000
      To Insurance Received a/c – 5,000

[For the amount received towards compensation

for loss of stock from the insurance company.]

Trial Balance of _____ as on 31st December 2005

Debit Credit
L/
Particulars Amount Amount
F
(in Rs) (in Rs)
–
–
Insurance Received – 5,000
–
–

Total      

Journal in the books of M/s __ for the period from ____ to _____
Credit
V/R Debit Amount
Date Particulars L/F Amount
No. (in Rs)
(in Rs)
Dec 31st – Insurance Received a/c  Dr – 8,000
      To Abnormal Loss Stock a/c – 8,000

[For the insurance realisation of abnormal loss

stock absorbed.]
Dr Insurance Received a/c Cr
Amount Amount
Date Particulars J/F Date Particulars J/F
(in Rs) (in Rs)
31/12/05 To Abnormal Loss Stock – 5,000 1st By Cash/Bank – 5,000
a/c -31st
      5,000       5,000

               
Dr Abnormal Loss Stock a/c Cr
J/ Amount J/ Amount
Date Particulars Date Particulars
F (in Rs) F (in Rs)
31/12/05 To Trading a/c – 24,000 –
31/12/05 By Ins. Received – 5,000
               
               
For the purpose of incorporating the same information as adjustment, the temporary account is assumed to have got
exhausted and the proceeds are considered for ascertaining the profit or loss on abnormal loss stock.