Financial Statements - II

Meaning of adjustments in Financial Statement

Every company prepares Profit & Loss Account and Trading account (also known as an income statement) and Balance Sheet statement(position statement) every financial year. The income statement indicates the net profit and loss status of a company, whereas, the balance sheet indicates the financial position of the business.

All these statements are provided according to the trial balance record. While preparing these accounts, it can be noticed that few accounts or transactions are (i) omitted from the record book (ii) sometimes have been recorded wrongly in the book or (iii) sometimes entered only one [part of the transactions. Entries passed for such financial transactions are known as adjustment entries.

Need for an accounting adjustment

  • To determine the correct net profit or loss of an organization
  • To determine the actual financial status of a company
  • To obtain a record of the transactions excluded from the record book
  • To correct the errors made in the books of account
  • To record expenses that have been received but not paid
  • To record such incomes that have accrued but not have been received
  • To provide for depreciation and other provision

Types of adjustment and its accounting method in financial statement

  • Closing Stock- It is the number of goods unsold until the end of the accounting year is called closing stock. This amount is not recorded in the trial balance, therefore, it should be included in the financial statement. This stock will be listed on the credit column of the trading account and in the asset section of the balance sheet.

The adjustment listing will be.

Closing Stock A/c Dr.

To Trading A/c

(Being closing stock shifted to the closing stock)

Recording in the financial statement will be

Dr.

Trading Account

Cr.

Particulars

Particulars

Closing Stock

——–

Dr.

Balance Sheet

Cr.

Particulars

Particulars

Closing Stock

——–

  • Outstanding Balance- This cost has been incurred in the accounting year, but is unpaid till the preparation of final account.

The adjustment listing will be.

Salary A/c Dr.

To Outstanding Salary A/c

(Being salary unsettled for November month)

Recording in the financial statement will be

Dr.

Profit & Loss A/c

Cr.

Particulars

Particulars

Salaries

Add: Salar Outstanding

Dr.

Balance Sheet

Cr.

Liabilities

Assets

Salary Outstanding

  • Prepared Expenses- Expenses that are advanced paid for the next year. Like, the insurance premium paid in the accounting year maybe for the year ending and the date falls in the next year.

The adjustment listing will be.

Prepaid Insurance premium A/c Dr.

To Insurance Premium A/c

(Being Insurance premium paid in advance)

Recording in the financial statement will be

Dr.

Profit & Loss A/c

Cr.

Particulars

Particulars

Insurance Premium

Less: Prepaid

Insurance Premium

Dr.

Balance Sheet

Cr.

Liabilities

Assets

Prepaid Insurance

  • Accrued Income- Income that is earned in the current year but not has actually received by the end of the accounting year. Examples interest on securities, share on a dividend.

The adjustment listing will be.

Rent Receivable(accured) A/c Dr.

To Rent Receivable A/c

(Being Rent amount due (not received)

Recording in the financial statement will be

Dr.

Profit & Loss A/c

Cr.

Particulars

Rent Received

Add: Rent Accrued

Dr.

Balance Sheet

Cr.

Liabilities

Assets

Rent Accured

  • Unearned Income- Sometimes the amount received in the accounting year does not belong to the current year such income is known as unearned income. Example- Rent received in advance for the next month

The adjustment listing will be.

Rent Received A/c Dr.

To Rent Received in advance A/c

(Being Rent received in advance)

Recording in the financial statement will be

Dr.

Profit & Loss A/c

Cr.

Particulars

Rent Received

Less: Rent received in advance

Dr.

Balance Sheet

Cr.

Liabilities

Assets

Rent received in advance

Rent Accrued

The above mentioned is the concept, that is elucidated in detail about ‘Financial Statement- II’ for the Commerce students. To know more, stay tuned to BYJU’S.