ADJUSTMENTS OF FINAL ACCOUNTS

In mercantile system of accounting, it is essential to adjust different accounts before the preparation of final accounts. It is quite common to adjust expenses paid in advance, incomes received in advance, income accrued but not received, bad debts, provision for bad debts depreciation on assets and soon. Journal entries are passed to effect the required adjustments; these entries are known as adjusting entries. There are many adjustments because earlier we have not passed any journal entry, so at the time of making final account we have to adjust them. 

Name of items	Adjustment entry	Effect on trading and profit and loss account	Effect on balance sheet
1. Closing stock	Closing stock a/c dr. xxx   To trading account xxx	Closing stock will write on the credit side of trading account	It will show as asset in the Balance sheet
2. outstanding expenses or expenses payable or expenses due but not paid	Expenses account dr. xxx   To outstanding exp. xxx	Outstanding expenses will add in respective expenses.  If it is direct it will go to trading account’s debit side , if it is indirect in nature then it will go to the debit side of profit and loss account	It will be the current liability so it will go to the liability side of balance sheet.
3. Advance or Prepaid expenses	Advance expenses a/c dr.    To expenses account xxx	It will deduct from respective expenses paid.	It will be the current asset so it will go to assets side of balance sheet
4. Accrued Income	Outstanding income dr. xx      To income account xxx	It will add in the income and go to credit side of profit and loss account	It will show as asset in the assets side of balance sheet
5. Income received in advance	Income account dr. xxx  To advance income a/c xx	It will deduct from the income received	It will shown as liability in the liabilities side of balance sheet
6 Goods use for personal use	Drawing account dr. xxx       To purchase account	It will deduct from purchase in the debit side of trading account =purchase –drawing in goods	It will deduct from capital in the liabilities side of balance sheet =capital- drawing in goods
7. Loss of goods by Fire or Accident	loss by fire a/c   Dr. xx To trading a/c If there is no insurance It will also go to profit and loss account Profit and loss a/c  dr. xxx     To loss by fire / accident	It will show on credit side of trading account. And also in profit and loss account’s debit side	It will not go to balance sheet
8. Depreciation	Depreciation account dr.xx  To respective asset a/c xxx	It will go to the debit side of profit and loss account	It will deduct from fixed asset. Because it decrease the value of an asset =fixed asset -depreciation
9. provisional for doubtful debts	If you have make any provision for doubt ful debts, its journal entry will passed: Provision for doubtful debts a/c                   dr. xx    To Bad debts account xx ( New bad debts which is not shown in trial balance will transfer to provision for doubtful debt account )	Net value of provision for doubtful debt account transfer to profit and loss account’s debit side =total bad debt + closing balance or provision of doubtful debt or this year provision - opening balance of provision for doubtful debts	Deduct from debtor = debtor – new bad debts – this year provision or closing balance of provision for bad debts
10. Prov. for discount on debtors	Profit and loss a/c  dr. xxx To Prov. for discount on Debtors a/c   xxx	The amount of provision for discount is calculated after deducting the provision for bad debts from sundry debtors. The amount should be debited to the profit and loss account of that year in which sales are made.	Deduct from Debtors = debtor – new bad debts – this year provision or closing balance of provision for bad debts – Prov. for discount on debtors.
11. Prov. for discount on creditors	Provision for discount on Creditor’s a/c Dr.        xxx   To Profit and loss a/c  xxx	Amount should be credited to the profit and loss account of that year in which purchases are made.	Deduct from Creditors. The amount of prov. for discount on creditors is calculated on total creditors.
12. Interest on Capital	Intt. on capital a/c dr. xx            To Capital a/c xxx	Interest on capital being an expense is debited to profit and loss account	Same amount of interest on capital is added to Capital.
13. Interest on Drawings	Capital a/c Dr.  To Interest on drawings a/c	The interest on drawings being an income is credited to profit and loss account	Same amount is shown as a deduction from the capital.
14. Goods given as charity or distributed as free samples.	Charity or Advertisement expenses a/c    dr.       xxx        To Purchase a/c   xxx	It will deduct from purchases in trading account and It will go to the debit side of P/L a/c as Charity or Advertisement expenses.
15. Commission to manager	Commission a/c  dr. xxx   To outstanding commission	It will shown in the debit side of profit and loss account as o/s commission to manager If it charge on the amount after charging such commission then we will calculate = profit before comm.*Rate/ 100+rate	It will shown as liability