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Final Accounts and its Adjustments

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Each and every business organization wants to know the amount of profit or loss made by it during the particular period of time. In order to determine the amount of profit or loss made by the business, it prepares trading and profit and loss accounts. Trading and profit and loss accounts help to know the amount of net profit or the net loss of the business during the particular period of time.

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The final account is the final process of accounting. It is an accounting process, which is prepared at the end of the given period of time. It is prepared to know the amount of profit or loss and financial position of the business. The amount of profit or loss of the business during the year is determined by preparing trading and profit and loss accounts. The financial position of the business on a particular date is determined by preparing the balance sheet. Thus, final accounts are the combination of trading account, profit and loss account and balance sheet.

The following are the main definitions of final account: -

“Final account is the account, which is prepared at the end of the given year or period, to see the profit and loss position as well as the financial position of a going concern for the period given.” – S. Mukherjee

“Final accounts consist of trading account, profit and loss account and balance sheet. The trading account shows the gross profit or gross loss, net profit or net loss is calculated from profit and loss account and the balance sheet is prepared to know the position of assets and liabilities.” – O. P. Gupta

Objectives of Final Accounts

The following are the main objectives of final accounts: -

  • To determine gross profit and the net profit of the business during the year.
  • To present the true financial position of the business on a given date.
  • To make effective control on financial activities of the business.
  • To make a summary presentation of all the financial transactions.
  • To communicate the operating results and financial position of the users.
  • To help in making a different financial decision to the users of accounting information.

Adjustments in Final Account

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The items that appear in the trial balance have a single effect in the final accounts but the transactions, which appear outside the trial balance, have a dual effect. The transactions, which do not appear in the trial balance, are to be noted as adjustments. The adjustment transactions represent such items of incomes and expenditures, which relate to the current year and have not yet been brought into the book of accounts. Such financial transactions are adjusted after the preparation of trial balance. The adjustment helps to determine the actual net profit and financial position of the business.

Every adjustment has a dual effect. The possible effects are as follows: -

  1. Trading account and balance sheet or
  2. Profit and loss account and balance sheet or
  3. Trading account and profit and loss account.

The followings are some of the significant adjustment transactions and their effects on final accounts: -

S.No.

Transactions

Effect on final accounts

Treatment in final accounts

1.

Closing Stock

Trading Account

Balance Sheet

Credit

Assets

2.

Outstanding Expenses

Trading Account or Profit and Loss Account

Balance Sheet

Debit (Add to the concerned item)

Liabilities

3.

Accrued Incomes

Profit and Loss Account

Balance Sheet

Credit (Add to the concerned item)

Assets

4.

Prepaid Expenses

Trading Account or Profit and Loss Account

Balance Sheet

Debit (Deduct from the concerned item)

Assets

5.

Advance Incomes

Profit and Loss Account

Balance Sheet

Credit (Deduct from the concerned item)

Liabilities

6.

Depreciation/ Amortization

Profit and Loss Account

Balance Sheet

Debit

Assets (Deduct from the asset)

7.

Bad Debts and Provision for Bad Debts

Profit and Loss Account

Balance Sheet

Debit

Assets (Deduct from debtor)

8.

Interest on Capital

Profit and Loss Account

Balance Sheet

Debit

Liabilities (Add to the capital)

9.

Interest on Loan

Profit and Loss Account

Balance Sheet

Debit

Liabilities

  • Closing Stock
    The unsold items of goods remained in the store at the end of the accounting year is called closing stock. It is an asset of the business. It is shown on the asset side of the balance sheet and credit side of the trading account.

  • Outstanding Expenses
    Expenses incurred but not yet paid are called outstanding expenses. They are the liabilities of the business. These are shown on the liabilities side of the balance sheet and added to the concerned item on the debit side of the trading or profit or loss account.

  • Accrued Incomes
    Accrued incomes are those incomes that are earned but not yet received. They are the assets of the business. These are shown on the assets side of the balance sheet and added to the concerned item on the credit side of the profit and loss account.

  • Prepaid Expenses
    Prepaid expenses are those expenses that are paid in advance. They are assets of the business. These are shown on the assets side of the balance sheet and deducted from the concerned item on the debit side of the trading or profit and loss account.

  • Advance Incomes
    The incomes, which are not earned but received in advance, are called advance incomes. They are the liabilities of the business. These are shown on the liabilities side of the balance sheet and deducted from the concerned item on the credit side of the profit or loss account.

  • Depreciation/ Amortization
    The permanent decrease in the value of fixed assets due to continuous use is called depreciation. It is the loss of the business. It is deducted from the concerned asset on the asset side and shown on the debit side of the profit or loss account.

  • Bad Debts and Provision for Bad Debts
    The uncollectible or irrecoverable amount of debtors is known as bad debts. The amount of provision, which is created for uncollectible debtors is called provision for bad and doubtful debts. These are losses of the business. It is deducted from debtors on the assets side of the balance sheet and shown on the debit side of the profit or loss account.

  • Interest on Capital
    The amount of interest, which is allowed on capital, is known as interest on capital. It is an expense. It is added to the amount of capital in the balance sheet and shown on the debit side of the profit or loss account.

  • Interest on Loan
    It is the amount of interest, which is allowed on the loan. It is an expense. It is shown on the liabilities side of the balance sheet and debited to the profit and loss account.



  • Final accounts are the combination of trading account, profit and loss account and balance sheet.
  • Trading and profit and loss accounts help to know the amount of net profit or the net loss of the business during the particular period of time.
  • The financial position of the business on a particular date is determined by preparing the balance sheet. 
  • The adjustment transactions represent such items of incomes and expenditures, which relate to the current year and have not yet been brought into the book of accounts. 
  • The transactions, which do not appear in the trial balance, are to be noted as adjustments.
  • Accrued incomes are those incomes that are earned but not yet received. 
  • The unsold items of goods remained in the store at the end of the accounting year is called closing stock. 
  • The permanent decrease in the value of fixed assets due to continuous use is called depreciation. 
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Very Short Questions

The following are the main objectives of final accounts: -

  1. To determine gross profit and net profit of the business during the year.
  2. To present true financial position of the business on a given date.
  3. To make effective control on financial activities of the business.
  4. To make a summary presentation of all the financial transactions.
  5. To communicate the operating results and financial position of the users.
  6. To help in making a different financial decision to the users of accounting information.

Final account is the final process of accounting. It is an accounting process, which is prepared at the end of the given period of time. It is prepared to know the amount of profit or loss and financial position of the business. The amount of profit or loss of the business during the year is determined by preparing trading and profit and loss accounts. The financial position of the business on a particular date is determined by preparing the balance sheet. Thus, final accounts are the combination of trading account, profit and loss account and balance sheet.

According to S. Mukherjee,“Final account is the account, which is prepared at the end of the given year period, to see the profit and loss position as well as the financial position of a going concern for the period given.”

From the above definition, it is clear that final account is an accounting process, which is prepared at the end of the given period of time. It is prepared to know the profit or loss and financial position of the business. Final accounts are the composition of trading account, profit and loss account and balance sheet of the business organization.

Solution:

Dr.

Trading a/c

Cr.

As on 31st Chaitra, 2069

Particulars

Amount

Particulars

Amount

To opening stock

1,30,000

By sales

4,00,000

To purchases

2,50,000

Less: returns

1,00,000

To wages

30,000

Add: outstanding

3,000

33,000

To gross profit

87,000

5,00,000

5,00,000

Dr.

Profit and loss a/c

Cr.

As on 31st Chaitra, 2069

Particulars

Amount

Particulars

Amount

To salaries

51,000

By gross profit b/d

87,000

Add: outstanding

4,000

55,000

By commission

3,000

To interest on loan

3,000

By net loss c/d

1,000

To insurance

5,000

Less: prepaid

2,000

3,000

To depreciation on:

Building

10,000

Furniture

3,000

Vehicles

10,000

23,000

To bad debts

5,000

Add: new provision for bad debts

4,500

9,500

Less: old provision for bad debts

2,500

7,000

91,000

91,000

Balance sheet

As on 31st Chaitra, 2069

Liabilities

Amt Rs.

Assets

Amt Rs.

Capital

4,00,000

Building

2,00,000

Less: drawing

50,000

Less: depreciation

10,000

1,90,000

3,50,000

Furnitures

30,000

Less: net loss

1,000

3,49,000

Less: deprecation

3,000

27,000

12% loan

50,000

Vehicles

50,000

Creditors

50,000

Less: depreciation

10,000

40,000

Bills payable

44,000

Debtors

1,00,000

Outstanding expenses:

Less: new bad debts

5,000

Wages

3,000

95,000

Salaries

4,000

7,000

Less: new provision

4,500

90,500

Bank balance

10,500

Bills receivables

40,000

Prepaid insurance

2,000

Closing stock

1,00,000

5,00,000

5,00,000

Solution:

Dr.

Trading a/c

Cr.

As on 31st Chaitra, 2069

Particulars

Amount

Particulars

Amount

To opening stock

1,30,000

By sales

4,00,000

To purchases

2,50,000

Less: returns

1,00,000

To wages

30,000

Add: outstanding

3,000

33,000

To gross profit

87,000

5,00,000

5,00,000

Dr.

Profit and loss a/c

Cr.

As on 31st Chaitra, 2069

Particulars

Amount

Particulars

Amount

To salaries

51,000

By gross profit b/d

87,000

Add: outstanding

4,000

55,000

By commission

3,000

To interest on loan

3,000

By net loss c/d

1,000

To insurance

5,000

Less: prepaid

2,000

3,000

To depreciation on:

Building

10,000

Furniture

3,000

Vehicles

10,000

23,000

To bad debts

5,000

Add: new provision for bad debts

4,500

9,500

Less: old provision for bad debts

2,500

7,000

91,000

91,000

Balance sheet

As on 31st Chaitra, 2069

Liabilities

Amt Rs.

Assets

Amt Rs.

Capital

4,00,000

Building

2,00,000

Less: drawing

50,000

Less: depreciation

10,000

1,90,000

3,50,000

Furnitures

30,000

Less: net loss

1,000

3,49,000

Less: deprecation

3,000

27,000

12% loan

50,000

Vehicles

50,000

Creditors

50,000

Less: depreciation

10,000

40,000

Bills payable

44,000

Debtors

1,00,000

Outstanding expenses:

Less: new bad debts

5,000

Wages

3,000

95,000

Salaries

4,000

7,000

Less: new provision

4,500

90,500

Bank balance

10,500

Bills receivables

40,000

Prepaid insurance

2,000

Closing stock

1,00,000

5,00,000

5,00,000

Solution:

Dr.

Trading a/c

Cr.

As on 31st Chaitra, 2069

Particulars

Amount

Particulars

Amount

To opening stock

15,000

By sales

77,000

To purchases

48,000

By closing stock

26,000

To wages and salary

13,000

To gross profit c/d

27,000

1,03,000

Dr.

Profit and loss a/c

Cr.

As on 31st Chaitra, 2070

Particulars

Amount

Particulars

Amount

To discount

1,000

By gross profit b/d

27,000

To audit fees

2,500

By discount received

1,000

To general expenses

4,000

By provision for bad debts

1,000

Add: outstanding

500

4,500

To depreciation on machinery

1,500

To insurance

800

To interest on loan

500

Add: outstanding

500

1,000

To net profit c/d

17,700

29,000

29,000

Balance sheet

As on 31st Chaitra, 2070

Liabilities

Amt Rs.

Assets

Amt Rs.

Capital

50,000

Building

10,000

Add: net profit

17,700

67,700

Machinery

15,000

Creditors

4,000

Less: depreciation

1,500

13,500

Bills payable

1,000

Books debts

16,000

General reserves

1,000

Cash at bank

6,000

10% loan

10,000

Investment

10,000

Outstanding expenses:

Bills receivable

3,000

General expenses

500

Prepaid insurance

1,000

Interest on loan

500

1,000

Less: expired

800

200

Closing stock

26,000

84,700

84,700

Solution:

Dr.

Trading a/c

Cr.

As on 31st Chaitra, 2069

Particulars

Amount

Particulars

Amount

To opening stock

12,000

By sales

To purchase

48,000

Less: returns

Less: returns

1,500

46,500

To wages

3,000

To gross profit c/d

28,000

89,500

89,500

Dr.

Profit and loss a/c

Cr.

As on 31st Chaitra, 2070

Particulars

Amount

Particulars

Amount

To freight on sales

500

By gross profit b/d

28,000

To salaries

7,400

By commission received

1,500

Less: prepaid

400

7,000

To discount allowed

500

To bad debts

500

Add: new provision for bad debts

500

1,000

Less: old provision for bad debts

1,000

0

To rent rates and insurance

900

To depreciation on plant and machinery

4,200

To net profit c/d

16,400

29,500

29,500

Balance sheet

As on 31st Chaitra, 2070

Liabilities

Amt Rs.

Assets

Amt Rs.

Capital

45,000

Goodwill

10,000

Less: drawings

5,000

Land and building

15,000

40,000

Plant and machinery

42,000

Add: net profit

16,400

56,400

Less: depreciation

4,200

37,800

Bank overdraft

12,000

Closing stock

7,000

Unearned commission

2,000

Prepaid salary

400

Less: earned commission

1,500

500

Debtors

10,000

Creditors

13,000

Less: provision for bad debts

500

9,500

Cash at bank

2,200

81,900

81,900

0%
  • The final account is ______ process of accounting.

    not the


    the second


    the first


    the final


  • "Final account is the account, which is prepared at the end of the given year period, to see the profit and loss position as well as the financial position of a going concern for the period given." Who gave this definition?

    Shyam Sundar Sharma


    O. P. Gupta


    S. Mukharjee


    Peter Drucker


  • "Final accounts consist of trading account, profit and loss account and balance sheet. Trading account shows gross profit or gross loss, net profit or net loss is calculated from profit and loss account and balance sheet is prepared to know the position of assets and liabilities." Who gave this definition?

    Gerson & Gerson


    J.R. Batliboi


    S. Mukharjee


    O. P. Gupta


  • Which one of them is not the objective of final accounts?

    To present erroneous financial position of the business on a given date.


    To make effective control on financial activities of the business.


    To determine gross profit and net profit of the business during the year.


    To communicate the operating results and financial position of the users.


  • The financial position of the business on a particular date is determined by preparing the ______.

    journal voucher
    trading account
    balance sheet
    profit and loss account
  • The items that appear in the trial balance have a ______ in the final accounts.

    no effect
    triple effect
    single effect
    dual effect
  • The transactions, which appear outside the trial balance, have a ______.

    single effect
    dual effect
    triple effect
    no effect
  • Expense paid in advance is called ______.

    prepaid expenses


    preliminary expenses


    outstanding expenses


    selling expenses


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

    prepaid expenses


    outstanding expenses


    preliminary expenses


    administrative expenses


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

    opening stock
    closing stock
    average inventory
    amortization
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