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Adjustment Entries

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The following are adjustment entries of journal proper:

Closing stock

.

Closing stock is valued after the preparation of trial balance. At the time of closing the account of a business, the unsold stock should be valued either at cost or market value whichever is lower.

Outstanding expenses

They are also known as unpaid expenses or outstanding expenses. The expenses incurred but not paid till the end of accounting year must be adjusted while preparing final accounts.

Prepaid expenses

They are also known as unexpired expenses or expenses paid-in-advance. The expenses which have been paid in advance is to be taken into account while preparing final accounts. Otherwise, true picture of profit or loss cannot be ascertained.

Accrued incomes

It is also known as receivable income or income earned but not yet received. Such receivable incomes should be adjusted while preparing final accounts.

Income received in advance

The income of the next year received in the current year is called incomes received-in-advance. Such advance received income which is also called pre-received income should be adjusted while preparing final accounts.

Depreciation of the fixed assets

The fixed assets are acquired by the business for generating revenues. In other word, assets are utilized in revenue generating activities. The decrease in value of the assets because of the use for the business is considered as depreciation. The value of depreciation is to be adjusted while preparing final accounts.

Interest on capital/ Interest on drawing

Interest is charged on the capital contributed by the owners of the business at a given rate. The amount of interest not paid during the period is to be adjusted, while preparing final accounts.

Interest on loan

The borrowing taken from the outside parties is regarded as loan. The interest on loan remained outstanding needs to be adjusted while preparing final accounts.

Goods destroyed by accidents

The value of goods damaged by accident must be adjusted at the time of preparing final accounts. The loss of goods by accident can be adjusted in the following way:

  • Goods destroyed by accident but not insured
    Goods destroyed by fire a/c...........Dr.
    To Trading a/c
    (Being goods destroyed by fire.)
    Profit and loss a/c.........Dr.
    To goods destroyed by fire a/c
    (Being loss transferred to profit and loss account.)

  • Goods destroyed by fire recovered fully from insurance company
    Goods destroyed by fire a/c..........Dr.
    To Trading a/c
    (Being loss of goods by fire.)
    Bank a/c.........Dr.
    To goods destroyed by fire a/c
    (Being cash received from insurance company for the goods damaged by fire.)

  • If insurance company has only accepted the claim and the cash not yet recovered
    Insurance Company.........Dr.
    To goods destroyed by fire a/c
    (Being insurance claim admitted for goods damaged by fire.)

  • Goods destroyed by accident but partial amount was recovered from insurance company
    Goods destroyed by fire a/c.......Dr.
    To Trading a/c
    (Being goods destroyed by fire admitted by insurance company.)
    Goods destroyed by fire a/c.......Dr.
    To Trading a/c
    (Being goods destroyed by fire.)
    Bank a/c.......Dr. (amount of claim received)
    Profit and loss a/c.........Dr. (actual loss not covered by compensation)
    To goods destroyed by fire a/c
    (Being cash received from insurance company as compensation partially and the damage not covered by insurance company.)



  • Closing stock is valued after the preparation of trial balance. 
  • The expenses which have been paid in advance is to be taken into account while preparing final accounts.
  • The decrease in value of the assets because of the use for the business is considered as depreciation.
  • The borrowing taken from the outside parties is regarded as loan. 
  • The amount of interest not paid during the period is to be adjusted, while preparing final accounts.

 

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Very Short Questions

Solution:

Adjusted trial balance of a firm

For the year ended 31st Chaitra, 2071

SN

Account Title

Unadjusted trial balance

Adjustments

Adjusted trial balance

Dr. Amt

Cr. Amt

Dr. Amt

Cr. Amt

Dr. Amt

Cr. Amt

1.

Capital

3,00,000

3,00,000

2.

Sales

8,00,000

8,00,000

3.

Bank loan

2,50,000

2,50,000

4.

Creditors

50,000

50,000

5.

Cash in hand

40,000

40,000

6.

Debtors

60,000

60,000

7.

Fixed assets

7,00,000

70,000

6,30,000

8.

Office expenses

2,00,000

2,00,000

9.

Salaries

2,50,000

10,000

2,60,000

10.

Other expenses

1,50,000

1,50,000

Additional information:

a)

Depreciation on fixed assets

70,000

70,000

b)

Outstanding salaries

10,000

10,000

Total

14,00,000

14,00,000

80,000

80,000

1,41,000

1,41,000

Solution:

Adjusted Trial Balance of Kailali Trading Concern

For the year ended 31st Chaitra 2070

SN

Account Title

Unadjusted trial balance

Adjustments

Adjusted trial balance

Dr. Amt

Cr. Amt

Dr. Amt

Cr. Amt

Dr. Amt

Cr. Amt

1.

Opening stock

10,000

10,000

2.

Wages

5,000

2,000

3,000

3.

Purchases

2,00,000

2,00,000

4.

Sales

4,50,000

4,50,000

5.

Building

5,00,000

25,000

4,75,000

6.

Salary

10,000

3,000

7,000

7.

Creditors

1,50,000

1,50,000

8.

Adjustment

12,500

12,500

Additional information:

a)

Outstanding wages

2,000

2,000

b)

Depreciation on building

25,000

25,000

c)

Prepaid salary

3,000

3,000

7,25,000

7,25,000

30,000

30,000

7,27,000

7,27,000

Solution:

Adjusted trial balance of Prakash Trading

For the year ended 31st December 2007

SN

Account Title

Unadjusted trial balance

Adjustments

Adjusted trial balance

Dr. Amt

Cr. Amt

Dr. Amt

Cr. Amt

Dr. Amt

Cr. Amt

1.

Fixed assets

1,50,000

1,50,000

2.

Cash

10,000

10,000

3.

Purchases

2,00,000

2,00,000

4.

Sales

3,00,000

3,00,000

5.

Administrative expenses

15,000

15,000

6.

Account payable

15,000

15,000

7.

Debtors

30,000

1,500

28,500

8.

Capital

1,00,000

1,00,000

9.

Prepaid insurance

10,000

4,000

6,000

Additional information:

a)

Insurance expired

4,000

4,000

b)

Provision for bad debts

1,500

1,500

Total

4,15,000

4,15,000

5,500

5,500

41,500

41,500

Solution:

Adjusted trial balance

SN

Account Title

Unadjusted trial balance

Adjustments

Adjusted trial balance

Dr. Amt

Cr. Amt

Dr. Amt

Cr. Amt

Dr. Amt

Cr. Amt

1.

Office Equipment

1,20,000

1,200

1,08,000

2.

Wages

2,600

1,000

3,600

3.

Prepaid rent

4,800

1,200

3,600

4.

Bills receivable

4,000

4,000

5.

Cash at bank

17,800

17,800

6.

Creditors

80,000

80,000

7.

Capital

64,800

64,800

8.

Service revenue

15,200

15,200

9.

Drawing

2,000

2,000

10.

Salaries

6,400

6,400

11.

Sundry expenses

2,400

2,400

Additional information:

a)

Prepaid rent expired

1,200

b)

Wages payable

1,000

c)

Depreciation on office expenses

1,200

Total

1,66,000

1,66,000

14,200

14,200

1,61,000

1,61,000

0%
  • Expense paid in advance is called ______.

    prepaid expenses


    outstanding expenses


    preliminary expenses


    selling expenses


  • Expenses incurred but not yet paid, are called ______.

    administrative expenses


    prepaid expenses


    outstanding expenses


    preliminary expenses


  • The unsold items of goods remained in the store at the end of the accounting year is called ______.

    opening stock
    amortization
    closing stock
    average inventory
  • The decrease in value of the assets because of the use for the business is considered as ______.

    appreciation
    testimonial
    depreciation
    gratitude
  • ______ is also known as  receivable income or income earned but not yet received.

    accrued incomes
    prepaid incomes
    outstanding incomes
    advance incomes
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