In view of the coronavirus pandemic, we are making LIVE CLASSES and VIDEO CLASSES completely FREE to prevent interruption in studies
Special Entries

Adjustment Entries

Adjustment entries are the journal entries that converts an entity’s accounting record in an accrual basis of accounting. In accrual basis of accounting, we recognize incomes when we earn them and not when we receive the cash. Similarly, we recognize the expenses when we incur them and not when we actually pay them. Also, there are some incomes earned but not received and incomes which are received in advance at the end of the accounting period. Similarly, there may be expenses which are outstanding and also there can be prepaid expenses. Such, accrued incomes, Incomes received in advance, outstanding and prepaid expenses require an adjustment in the books of accounts.

Browse more Topics under Special Entries

Adjustment Entries

An accountant or a bookkeeper makes adjustment entries either before preparation of trial balance or after preparation of trial balance.

Usually, adjustment entries are made after preparation of trial balance. In a case when he makes the adjustment entries after preparation of trial balance, he needs to treat each of the adjustment twice while preparing trading and profit and loss account and balance sheet.

In case adjustment entries made before preparation of trial balance, such adjustment appears in the trial balance. Also, such adjustments appear only once in the preparation of final accounts.

There are various types of transactions which require adjustments. Some of the principal types of transaction which requires adjustments are as below: –

1. Closing Stock

Adjustment entry for adjustment of closing stock is as follows: –

Date Particulars Amount (Dr) Amount (Cr)
xx Closing Stock Dr.  XXX
To Trading A/c XXX

As the closing stock is an item outside the trial balance, we need to treat it twice. Thus, it will appear in the trading account and also in the balance sheet. Sometimes, closing stock is recorded in the books of accounts before preparation of trial balance. In such cases, we need to adjust the purchases for both opening and closing stock.

Learn more about Closing Entries here in detail.

2. Outstanding Expenses

There are some expenses like salary, wages, rent etc which are incurred but remain unpaid at the end of the accounting period.

For Example – Wages amounting 5000 becomes due on 31st March but remains unpaid during the respected financial year. These wages are termed as outstanding wages.  Such outstanding wages will be added in the wages appearing in the trading and profit and loss account and will also show as a liability in the balance sheet of an entity.

3. Prepaid Expenses

These are the expenses which are paid in one accounting period but its benefits are received in another accounting year.

For Example – Insurance premium for one year amounting 12,000 paid on 1st February. The accounting year ends on 31st March. Now, in such case insurance premium for ten months, April to January amounting 10,000 is paid in advance i.e. prepaid.

4. Accrued Income

It is the income which is earned in the current accounting period but the same is not received during the accounting period.

5. Income Received in Advance

These are the incomes which are received in the current accounting period but services against the same will be rendered in the next accounting period. For Example, Rent received in advance.

Such advance rent will be deducted from the rent received on the credit side of profit and loss account. And also it will be shown as a liability in the balance sheet as rent received in advance.

6. Depreciation on Fixed Asset

Depreciation on the fixed asset is shown as an expense on the debit side of the Profit and Loss Account. Whereas, in a balance sheet, it is deducted from the respected fixed asset.

7. Bad Debts

When debtors make failure in payment of debts they are called bad debt. Bad debt is the amount which is unrecoverable from the debtors.

We show Bad debts on the debit side of Profit and loss account. Also, in the Balance Sheet, we deduct the amount of bad debts from the debtors. However, when the bad debts appear in the trial balance then in such a case we will debit it as an expense in the Profit & loss account only.

Sometimes, a firm may recover these bad debts subsequently. In such cases, the amount of bad debts recovered is credited to the bad recovered account. Also, such recovered amount is credited in the Profit & loss account.

8. Provision for discount on Debtors

A firm creates it to encourage the debtors towards early payments of debts. We calculate it after deducting bad debts and provision for bad debts from the debtors.

Adjustment Entries

Source: freepik.com

9. Interest on capital

Interest on capital of proprietor or partners is a business expense. Adjustment entry is as follows: –

Date Particulars Amount (Dr) Amount (Cr)
xx Interest on Capital A/c Dr . XXX
To Capital A/c XXX

This entry will increase the balance in the capital account of proprietor or partners by the amount of interest as it appears in the balance sheet. Thus, we debit Interest on capital as an expense in the statement of Profit and loss.

10. Manager’s commission

Sometimes the manager is also eligible to a commission on profits at a fixed rate.  The calculation of commission is as follows: –

  • Commission on profit before charging such commission: –

Profit before commission x \(\frac{Rate of Commission}{100}\)

  • Commission on profit after charging such commission: –

Profit before commission x  \(\frac{Rate of Commission}{100 + Rate of Commission }\)

We show the commission payable as an expense in Profit and Loss account and also in the balance sheet on the liabilities side.

11. Goods distributed as free samples

For promoting sales of an entity, it distributes free samples. Thus, it charges the cost of such free samples to advertisement account. This also reduces the stock of finished goods. Adjustment entry is as follows: –

Date Particulars Amount (Dr) Amount (Cr)
xx Advertisement A/c Dr . XXX
To Purchases A/c XXX

Solved Example for You

Pass the necessary journal entries to make the following adjustment as on 31st Dec. 2017

  1. Stock on 31st Dec. 2017 was Rs.25, 000.
  2. Depreciation @10% on furniture valued at Rs. 5,000 and machinery valued at Rs. 60,000.
  3. Interest accrued on securities Rs 700.
  4. Bad debts during the year amounted to Rs. 450.
  5. Unexpired insurance as on 31st Dec. 2017 was Rs.1, 290.
  6. Salaries outstanding on 31st Dec. 2017 were Rs. 16, 000.
  7. Make provision for discount on debtors @ 2.5%. The debtors at the end of the year were Rs.70, 000.

Ans.

                                                                        Journal Entries

Date Particulars Amount(Dr.) Amount(Cr.)
i) Stock A/c Dr. 25000
    To Trading A/c 25000
(being the value of closing stock)
ii) Depreciation A/c Dr. 6500
     To Furniture A/c 500
     To Machinery A/c 6000
(being depreciation @10% on furniture & machinery)
iii) Interest Accrued A/c Dr 700
     To Interest  A/c 700
(Being interest accrued on securities)
iv) Bad debts A/c Dr 450
     To Debtors A/c 450
(Being bad debts charged)
v) Prepaid Insurance A/c Dr 1290
    To Insurance A/c 1290
(being amount of unexpired insurance on balance sheet date)
vi)  Salary A/c Dr 16000
     To Salary outstanding A/c 16000
(Being salary outstanding)
vii) Profit & Loss A/c Dr 1750
   To Provision for discount on      debtors 1750
(being provision made @2.5 % for a discount on debtors)

 

Share with friends

Customize your course in 30 seconds

Which class are you in?
5th
6th
7th
8th
9th
10th
11th
12th
Get ready for all-new Live Classes!
Now learn Live with India's best teachers. Join courses with the best schedule and enjoy fun and interactive classes.
tutor
tutor
Ashhar Firdausi
IIT Roorkee
Biology
tutor
tutor
Dr. Nazma Shaik
VTU
Chemistry
tutor
tutor
Gaurav Tiwari
APJAKTU
Physics
Get Started

Leave a Reply

avatar
  Subscribe  
Notify of

Stuck with a

Question Mark?

Have a doubt at 3 am? Our experts are available 24x7. Connect with a tutor instantly and get your concepts cleared in less than 3 steps.
toppr Code

chance to win a

study tour
to ISRO

Download the App

Watch lectures, practise questions and take tests on the go.

Get Question Papers of Last 10 Years

Which class are you in?
No thanks.