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Accounts thoroughly

How to solve difficult

adjustments in Financial Accounts
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Are prepared By Only
Only to Difficult
Clarify major Professors Augustin Amaladas Adjustments
Doubts and Shanthi Augustin are
To students M.Com(Loyola, Chennai)., AICWA explained
And staff.
Alternative work is rest
 Why does Equity shares and fixed
assets appear first in the Balance
sheet
• The balance sheet is prepared in order. Left hand side
liabilities and right hand side Assets. If business
comes to an end the liability which is paid last is
share capital. The last asset which is sold out will be
fixed asset. Among fixed assets goodwill(good name)
is sold out last.No one wants to sell one’s name unless
everything is lost.The order of arrangement is known
as order of permanence.
• What is the Order of Liquidity?
 Order of Liquidity?
• The liability which is disposed off first comes
first in the balance sheet. The asset which is used
to pay liability first appears first in the assets side.
• Therefore cash appears first in the balance sheet
asset side. And Creditors should appear in the
liability side first.
• The above two orders are known as marshalling
 Income tax paid by sole proprietor and
partnership business-Journal entry?
• Income tax does not recognise sole proprietor or firm as a
unit but the individuals who run the organisation are
recognised.
• Income tax is a direct tax. Direct taxes such as Income tax,
wealth tax are to be paid by the individual who runs such
organisation.It is a personal liability even such incomes from
business.
• If business money is used for personal use of paying tax, then
such payment to be treated as drawings.
• Journal entry: Debit drawings and credit Cash.
• Note: do not debit incometax account.
• If you debit income tax account it means that its treated as
business expenditure. It is wrong in this case.
If Income tax paid by company?
• Company is a separate legal entity.The
payment of tax is the liability of the
company. It is not the liability of
Shareholders. SHARE HOLDERS ARE
DIFFERENT FROM COMPANY.
• It is a business expenditure.
• Journal entry: Debit Income tax account
and credit Cash account.
 How do you deal indirect taxes?
• Indirect taxes such as sales tax, excise duty, Octroi
duty, import duty, export duty are actually
imposed on the individual who buys such article.
It is not the responsibility of the individuals who
run the business but by the business itself. It is a
business expenditure.
• Journal entry: Debit sales tax a/c Credit cash a/c
 5.Double entry / Single entry

• Is Accounting based on business concept or

religious concept?
 It is based on religious concept
• Giving first and receiving later.
• Giving cash receiving machinery
• God is an accountant for every business. Who ever
gives given credit.whoever receives given debit.
What ever goes out of you to be credited because
god will reward you.What ever comes to you is
given debit because god will take away from you.
• Giving is right hand function.Receiving is left
hand function.
 Rules of acccounting

• Personal rule/Account-supplier debtors,

owner, banker, outstanding wages
• Real rule/Account- cash, bank, building,
furniture, goodwill, patent rights
• Nominal rule/account: income and
expenditure: salary, rent , insurance,
commission, internet expenses, cell phone
expenses.
 Personal rule

• Debit the receiver

• credit the giver
• Example: Computer chips purchased on credit
from wipro
• Here credit Wipro as Wipro is the giver of
computer.
• Sold goods to Meena
• Meena is the receiver-debit
 Exercise
• 1.Amount collected from debtors?
• 2.Amount deposited to bank?
• Answer 1: two accounts to be selected.A) cash because
it comes in B) debtors given money.The giver to be
given credit- PERSONAL RULE.
• Cash related to real rule because we can see.
• Therefore Journal entry Is: Debit cash, credit
debtors.
2. Banker is the receiver –related to personal rule therefore
debit bank. Cash goes out –related to real rule-credit
cash.
 Real rule
• These are the accounts of assets and liabilities

• Rule:debit what comes in

• Credit what goes out
 Excercise

• 1.Goods supplied for cash

• 2.Cash withdrawn from bank
• 3.Cash withdrawn from bank for personal
use
• 4.Land purchased by giving a cheque
• 5.Building sold on credit
• Answer: 1.Goods and cash are two accounts
required. Person who supplied is not important as
it is a cash transaction.Both are related to real
rule.
• JE: Goods A/c debit
Cash A/c credit
2.Cash and bank are two accounts. Both are related
to real rule.
JE: Cash a/c debit
Bank a/c credit
Note: Cash withdrawn does not mean
drawings.Only when cash withdrawn for personal
use we consider it as drawings.
• 5. Building sold on credit.
• He is not a dealer in building.If he is not a dealer
in building we can not consider it as goods. Only
when they are goods they can be taken to
sale(Revenue income) otherwise they should be
removed from capital expenditure.
• JE:The person who buys a/c debit
• Building account credit.
• 3. Cash with drawn for personal use:owner and
cash is important. Owner is personal rule and cash
is related to real rule.Debit the receiver, therefore
debit drawings and credit bank as banker is the
giver of cash.
• JE: Drawings a/c debit
• Bank a/c credit
• 4.Land purchased by giving a cheque:
• Land and bank are two important.Both are related
to real rule. Debit what comes in and credit what
goes out.
• JE: Land A/c debit
• bank A/c credit
 Nominal rule

• Related to Expenses and income

• Rule: Debit all expenses and
losses
• Credit all incomes and
gains
Exercise
• Rent paid Rs 50,000(Rent debit and cash credit)
• Wages paid Rs.1,00,000(wages debit and cash credit)
• Wages outstanding-Rs.60,000(wages a/c debit and
outstanding wages to Mr.X to be credited)
• Commission received-25,000(Cash A/c debit and
commission a/c to be credited)
• Discount allowed to customer – Rs.1,000(Discount is
related to nominal rule.debit discount and credit debtors
who had given cash)
• Telephone bills paid-Rs.2500(Telephone a/c debit and cash
to be credited)
• Shares issued at premium-Rs.2,00,000(Cash a/c debit and
share premium to be credited as it belongs to nominal rule)
Suitable questions to pass journal
entry
• If cash transaction, person is not important
• Every birth of an account there is a death of
the account
• Ask what comes in?
• Or what goes out?
 What is the journal entry for bad
debts?
• Bad debt a/c debit
• to debtors a/c
• Bad debt follows nominal rule. Debit all
expenses and losses and credit all income
and gains.
• Debtors account follow personal rule.
Debit the receiver and credit the giver.
 Journal entry for provision for bad
and doubtful debts?
• Profit and loss account Debit
• credit provision for bad and doubtful
debts
• Reasons:- All provisions are taken out of
profits. It means profit is reduced and
provision to be increased. All provisions
are future expected liabilities.
 Rent and rent outstanding exp
• JE: Rent debit and cash credit
• Rent outstanding:
• Rent debit and rent outstanding to some
one(say Mr.X )credit.
• Rent appears in the profit and loss
account debit side
• Rent outstanding appears in the balance
sheet under the head current liabilities.
 What is contingent liability?
• Liability which may or may not happen
depends on the future situations
• Example:1. Court case against the
company
• 2. contract yet to be completed.
• No journal entry as it is not a real
liability on the date of balance sheet.
 Final Accounts Adjustments

• Domestic house hold Expenses(Drawings a/c

debit and cash credit)
• Income tax refund( It is a personal income.If it is
taken to the business then cash a/c debit and
capital a/c credit)
• Income from house property( cash a/c debit and
capital credit) as personal income has been taken
to business.
• Un expired insurance(Unexpired insurance
debit(asset) insurance premium a/c credit)
• Income received in Advance(It is a liability.debit
income a/c and credit income received in advance
a/c credit)
• Interest on Capital( it is an expenditure. Interest on
capital a/c debit and capital account credit)
• Provision on Doubtful debts(Profit and loss a/c debit
and provision for bad and doubtful debts credit)
• provision for Discount on debtor( Profit and loss
account debit and provision for discount on debtors
credit)It is because all provisions are taken from
profit and loss account.
• Deferred revenue expenditure((HUGE Revenue
expenditure incurred during the current year but can
not be treated as one year expenditure as the benefit
will come for more than a year.)
• JE: Deferred revenue expenditure a/c debit and cash
to be credited.
 Final Accounts Adjustments
• Reserve Fund( all reserves taken from profit. debit
profit and loss a/c and credit Reserve fund)
• Goods Distributed as free sample( goods with
drawn other than trading activity: Advertisement
a/c debit and purchase a/c credit)
• Manager’s Commission( he is entitled to receive
commission. Therefore: Manager’s commission
a/c debit and Outstanding commission a/c credit.
 Bad debts written off recovered
• Once bad debts written off means that it is
completely removed from debtors and transferred
to profit and loss account as a loss.There is no
such account is seen any where in the books.
• If recovered such recovery does not affect debtors
but affects profit and loss account
• JE: Cash a/c debit
• Bad debts recovery or profit and loss a/c
credit
Goods destroyed due to fire and insurance company
partly accepted

• Goods which are meant for trading

destroyed. Operating activity becomes non
operating activity or extraordinary activity.
• JE: Insurance company a/c debit(like a
debtor or asset)
loss of stock a/c debit
Trading a/c or purchase account
 What do you mean by adjustment
accounting point of view?
• It means pass a fresh journal entry.
• It means any item appears in the trial balance means
that we had already passed journal entry. That is why
such items appear only once in the final account.
• Since we pass journal entry for adjustments they appear
twice in the final accounts.
• The head of the account is important when you pass a
fresh journal entry for adjustments.Example:rent
outstanding means rent account. Insurance prepaid
means insurance account, interest due means interest
account,
If closing stock appears in trial balance where should
appear in the final accounts?

• If it appears in the trial balance means we

had passed journal entry for such stock and
adjusted with purchases to calculate cost of
goods sold. Therefore it should not appear
in the trading account. Being an asset it
should appear in the Balance sheet.
 Out standing expenses(rent)
given in the trial balance?
• It means it is already journal entry passed
and adjusted with rent account(added to
rent)
• Do not adjust with rent in profit and loss
account.
• Take such item to balance sheet as a
liability.
 How do you deal advanced
income tax paid by proprietor?
• Income tax paid itself is considered as
drawings, therefore advanced income tax
also to be considered as drawings onle
• JE: Drawings a/c debit and cash a/c to be
credited.
 Bad debts given in the trial
balance?
• It means journal entry was passed and
adjusted against debtors(head). Do not adjust
such bad debts against debtors in the balance
sheet.
• As a loss it should appear in the profit and
loss account.
• If such bad debt is given in the adjustments?
• It means pass a fresh journal entry for the
new bad debt and to be adjusted with the head
of such account(Debtors).
• Reduce such bad debt from debtors in the
balance sheet before calculating provision for
bad and doubtful debts.
• As a new bad debt add to the existing bad
debts which is given in the trial balance
which will appear in the profit and loss
account.
 Do we deduct discount allowed given in the
adjustment from debtors before calculating
provision for bad and doubtful debts?

• Yes. It is because it is given in the

adjustment and also it is certain that such
debtors already gone out of books of
debtors. There is no doubts about it. The
provision is always calculated only on
debtors who are shaky.
 If goods sent out on Higher
purchase how do you deal?
• If on the balance sheet date if such goods
are with the customer divide the goods into
two

Profit = Debtors
Cost +

Add to Closing
stock in trading a/c and Reduce from debtors
Balance sheet
 What is the JE when goods are
received by consignee from
consignor?
• No journal entry. Why?
• Owner ship is not transferred from consignor to
consignee. Even though the goods are physically in
the hands of consignee but there is no transfer of
goods taken place from consignor to
consignee.Owner ship should be transferred to pass
journal entry.
• The concept is that one person can not transfer to
oneself.
 When branch sends goods to
head office or vice versa, what is
the journal entry?
• No journal entry as ownership is not transferred.In
fact there can not be any sales tax, income tax.
• One person can not earn profit by transferring to
one self.Unless goods are transferred to third party
no profits can be realised.
 If sales return given in the
adjustment?
• It means we have to pass a fresh journal
entry.
• JE: Sales a/c Debit
Debtors account credit
We have to reduce sales and debtors once
goods are returned.
What is the JE when normal loss
occur?
• No Journal entry. Why.
• Cost per unit will be inflated.You make
customer to bear the total cost.
• If abnormal loss occurs why do we pass
journal entry?
• It is because some portion will be recovered
from insurance and some portion will be the
loss to be written of against profit.
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