Special Adjustments of financial statement

1. Salary: Salary paid is an indirect expenses and so It is recorded in debit side of Profit and Loss A/c but salary paid to an employee in a factory is a direct expense and hence recorded in Trading A/c.
2. Salary, wages and salary: If both the words are
given combined it is assumed that salary account represents greater amount than that of wages and so dominates over wages. So, it is recorded in Profit and Loss A/c. In the same way, when wages and salary are given combined it is presumed than wages dominates over salary and recorded in Trading A/c.
3. Advertisement: Advertisement is an indirect ex-
penses and recorded in Profit and Loss A/c but if any goods is distributed as free sample or goods given in charity then it is recorded in Trading A/c.
4. Income tax: Income tax is a personal expense and is treated as drawing. It is not recorded in Profit and Loss A/c
5. Closing stock Closing stock appearing in the
Trial Balance is treated as an asset. Hence, it is recorded in the asset side of balance sheet and not in trading account.
6. Depreciation: This indicates the reduction in the value of fixed assets due to Wear and tear. As the basic cost of the fixed assets is not transferred to Profit and Loss Account, this adjustment is necessary to reflect the cost for the use of fixed asset during the year. Accordingly, the first effect of the adjustment for Depreciation is that the amount is debited to Profit and Loss Account reducing the profit or increasing the loss and the second effect is that the corresponding amount is reduced from the value of fixed asset in the Balance Sheet. In other ords, the value of fixed assets in the Balance Sheet is net of depreciation. The Journal Entry passed for this is
To, Fixed Asset A/c
7. Outstanding Expenses: This indicates the amout of expenses pertaining to the relevant period which are paid during the said period. According to Matching Priciple of Accounting, income for a certain period needs to compared with the expenses for the same period, whether is paid for or not. Accordingly, the first effect of this adjutment is that the corresponding amount of expenses are creased reducing the profit or increasing the loss and second effect is that the corresponding amount is shown Current Liability on the Balance Sheet liabilities side. Jounal Entry passed for this is-
Expenses A/c Dr.
To, Outstanding Expenses A/c
8. Prepaid Expenses: This indicates the amount
expenses pertaining to the next period which are paid advance during the relevant period. According to Matchin Principle of Accounting, income for a certain period need to be compared with the expenses for the same period. A cordingly, the first effect of this adjustment is that the corr sponding amount of expenses are reduced, thus increasin the profit or reducing the loss and the second effect is th the corresponding amount is shown as Current Asset c the Balance Sheet Asset side. The Journal Entry passed fo this is-
Prepaid Expenses A/c Dr.
To, Expenses A/c
9. Accrued Income: This indicates the amount c
income for the current period which is not received durin the current period. According to Matching Principle of Ac counting, income for a certain period needs to be compare with the expenses for the same period. Accordingly, the firs effect of this adjustment is that the corresponding amour of income is increased, thus increasing the profit or reducing the loss and the second effect is that the correspondin amount is shown as Current Asset on the Balance She Asset side. The Journal Entry passed for this is
Accrued Income A/c Dr.
To Income A/c
10. Income Received in Advance: This indicates the amount of income for the next period which is received during the current period. According to Matching Principle Accounting, income for a certain period needs to be compared with the expenses for the same period. Accordingly the first effect of this adjustment is that the corresponding amount of income is reduced, thus reducing the profit or increasing the loss and the second effect is that the corresponding amount is shown as Current Liability on the Balance Sheet Liabilities side. The Journal Entry passed for this is
Income A/c Dr.
To Income received in advance A/c.
11. Bad Debts: This indicates the unrecoverable_
mount from the customers on account of credit sales made to them. If the customer is not likely to pay the amount due from him. the same is written off as Bad Debts. Accordingly. the first effect of this adjustment is that the amount of Bad Debts is debited to Profit 2nd Loss Account, thus reducing the profits or increasing the losses and the second effect is that the, amount of Sundry Debtors is reduced. The Journal Entry passed for this is-pa
Bad Debts A/c Dr.
To, Sundry Debtors
12. Provision for Doubtful Debts Provision for
doubtful debts is necessary due to the possibility that all the customers to whom the credit sales have been made may not pay the entire amount. Accordingly, the first effect of this adjustment is that the amount equivalent to the provision for doubtful debts is written off to Profit and Loss Account and the second effect is that the corresponding amount is reduced from the Sundry Debtors in the Balance Sheet. It should be noted that if the provision for bad and doubtful debts is to be maintained at a certain percentage of Sundry Debtors and provision to some extent has already been made in the books of account, the differential amount only needs to be debited to Profit and Loss Account. The Journal Entry passed for this is-
Profit and Loss Account Dr.
To, Sundry Debtors A/c
13. Provision for Discount on Debtors: In some cases it is necessary to allow cash discount to the customers for making the early payment. As the amount of debtors who are likely avail the cash discount is not known in advance, a provision is made in the books of account for the discount to be allowed to debtors. Accordingly, the first effect of this adjustment is that the amount equivalent to the provision for discount on debtors is written off to Profit and Loss Account and the second effect is that the corresponding amount is reduced from the Sundry Debtors in the Balance Sheet. The Journal Entry passed for this is-
Profit and Loss Account Dr.
To, Sundry Debtors A/c
14. Interest on Capital: In order to calculate the profit earned by the organization properly, in some cases interest may be provided on the amount of capital introduced by the proprietor or partner in the business. It may not be out of place to mention here that In case of partnership firms, interest on capital is considered to be an allowable expenditure for calculating the tax liability as per the provisions of Income tax Act, 1961 if it payable to the Working Partners at the rate which is not exceeding 12% p.a. Accordingly, the first effect of this adjustment is that the amount of Interest on Capital is debited to Profit and Loss Account, thus reducing the profits or increasing the losses and the second effect is that the corresponding amount is credited to the Capital Account of proprietor or partner. The Journal Entry passed for this is –
Interest on Capital A/c Dr.
To, Capital A/c