1. Financial statementsFinancial statements
Adjustments to financialAdjustments to financial
statementsstatements

2. Outstanding ExpensesOutstanding Expenses
 Expenses due in the current accountingExpenses due in the current accounting
periodperiod
 Payment is made in the next accountingPayment is made in the next accounting
periodperiod

3. For Eg:For Eg: Salary account in the ledgerSalary account in the ledger
shows Rs. 250,000/- at the end ofshows Rs. 250,000/- at the end of
the year ( 31-3-2007), means totalthe year ( 31-3-2007), means total
amount of salary paid for the year isamount of salary paid for the year is
Rs. 250,000/- . This may not includeRs. 250,000/- . This may not include
the salary for the MARCH.the salary for the MARCH.
Suppose last months salary is Rs.Suppose last months salary is Rs.
25,000/- this will be paid in the next25,000/- this will be paid in the next
accounting year. Ie., in April 2007accounting year. Ie., in April 2007
Salary for the month of March isSalary for the month of March is
considered asconsidered as OUTSTNDING SALARYOUTSTNDING SALARY

4. Treatment of out standingTreatment of out standing
ExpensesExpenses
 Will be added to the respective item ofWill be added to the respective item of
expenses in the Trading account or Profitexpenses in the Trading account or Profit
and loss accountand loss account ( For Debit aspect )( For Debit aspect )
 The out standing salary account will beThe out standing salary account will be
shown in the liability side of Balanceshown in the liability side of Balance
sheet under the heading Currentsheet under the heading Current
liabilitiesliabilities ( for Credit aspect )( for Credit aspect )

5. Pre paid ExpensesPre paid Expenses
 Opposite to outstanding expensesOpposite to outstanding expenses
 Expenses which are paid in the currentExpenses which are paid in the current
year , but will be due for payment in theyear , but will be due for payment in the
next year.next year.

6. For Eg: Insurance premium Rs. 60,000/- for theFor Eg: Insurance premium Rs. 60,000/- for the
period 1period 1stst
January 2007 to December 31January 2007 to December 31stst
20072007
is paid as on 1is paid as on 1stst
January.January.
Out of Rs.60,000 paid , 3 months insuranceOut of Rs.60,000 paid , 3 months insurance
premium is for the current financial year andpremium is for the current financial year and
rest is for the subsequent financial year.rest is for the subsequent financial year.
Ie., Rs.45,000/- is pre paid insurance premiumIe., Rs.45,000/- is pre paid insurance premium

7.  Will be deducted from the respective headWill be deducted from the respective head
of expenses in Profit and loss account orof expenses in Profit and loss account or
the trading accountthe trading account ( Credit aspect )( Credit aspect )
 Will be shown on the assets side of theWill be shown on the assets side of the
balance sheet under the heading currentbalance sheet under the heading current
assets.( debit aspect )assets.( debit aspect )
Treatment of Pre paid expensesTreatment of Pre paid expenses

8. Accrued IncomeAccrued Income
 Income is due for the current year ,Income is due for the current year ,
 but received in the next financial year.but received in the next financial year.

9.  Interest on fixed deposit Rs. 50000 due onInterest on fixed deposit Rs. 50000 due on
28-03-07. But the amount is not received in the28-03-07. But the amount is not received in the
current financial year. (2006-07)current financial year. (2006-07)
As at the year end,( 31.3.2007) the amountAs at the year end,( 31.3.2007) the amount
Rs. 50,000 will be considered as income dueRs. 50,000 will be considered as income due
but not received or accrued income.but not received or accrued income.

10. Treatment of Accrued IncomeTreatment of Accrued Income
 Accrued Income should be added to theAccrued Income should be added to the
concerned income in the credit side ofconcerned income in the credit side of
the profit and loss accountthe profit and loss account ( credit( credit
aspect )aspect )
 Same amount should be shown in theSame amount should be shown in the
balance sheet assets side under currentbalance sheet assets side under current
liabilitiesliabilities( Debit aspect )( Debit aspect )

11. Income received in AdvanceIncome received in Advance
 An Income which is due in the nextAn Income which is due in the next
accounting year butaccounting year but
 But received in the current year.But received in the current year.

12. Treatment of Income received inTreatment of Income received in
AdvanceAdvance
 Income received in advance should beIncome received in advance should be
deducted from the concerned income indeducted from the concerned income in
the Profit and Loss account credit sidethe Profit and Loss account credit side (for(for
Debit aspect )Debit aspect )
 Should be shown in the balance sheetShould be shown in the balance sheet
liability side under the current liabilitiesliability side under the current liabilities
(for credit aspect )(for credit aspect )

13. Adjustment related to debtorsAdjustment related to debtors
Sundry debtors :
The sum total of amounts , which the
customers owe to the business for
purchasing goods on credit known as
Sundry debtors

14. Classification of DebtClassification of Debt
Good debt : Sure to be realized
Doubtful debts : May or may not be
realised
Bad debts : Irrecoverable or
unrealizable
debts

15. Bad DebtBad Debt
 If the bad debt is given in the Trial balanceIf the bad debt is given in the Trial balance
:-:- to be debited in the profit and lossto be debited in the profit and loss
accountaccount
 If the bad debt is given in the adjustment :-If the bad debt is given in the adjustment :-
• Debit in the Profit Loss accountDebit in the Profit Loss account
• Deduct from Sundry DebtorsDeduct from Sundry Debtors

16. Bad DebtBad Debt
 If further bad debt to be adjusted :If further bad debt to be adjusted :

AddAdd the Bad debt given in thethe Bad debt given in the
Adjustment to the Bad debt given inAdjustment to the Bad debt given in
the trial balance and debit to thethe trial balance and debit to the
profit and loss accountprofit and loss account
• DeductDeduct from Sundry Debtorsfrom Sundry Debtors

17. Provision for bad debtsProvision for bad debts
At the end of the year, Any bad debt isAt the end of the year, Any bad debt is
estimated but not confirmed ,then aestimated but not confirmed ,then a
provision for that debt will have to beprovision for that debt will have to be
created in the books of accounts .created in the books of accounts .

18. Treatment of Provision for badTreatment of Provision for bad
debtsdebts
 Provision for bad debt should be debitedProvision for bad debt should be debited
in the profit and loss accountin the profit and loss account
 Should be deducted from Sundry debtorsShould be deducted from Sundry debtors
in the Balance sheetin the Balance sheet

19. Writing off Further badWriting off Further bad
debts when a Provision isdebts when a Provision is
given (OLD) in the trialgiven (OLD) in the trial
balancebalance

20. A.A. Existing Provision for doubtful debtsExisting Provision for doubtful debts
is less than the total of bad debtsis less than the total of bad debts
written off and new provision forwritten off and new provision for
doubtful debts is to be shown in thedoubtful debts is to be shown in the
statementsstatements..

21. 1.1.Provision for the doubtful debts given inProvision for the doubtful debts given in
the trial balance (cr) Rs1000the trial balance (cr) Rs1000
2.2.Bad debts given the trial balance (Dr.)Bad debts given the trial balance (Dr.)
Rs. 600Rs. 600
3. Further bad debts to be written off3. Further bad debts to be written off
( given in the adjustment ) Rs. 800( given in the adjustment ) Rs. 800
4. Provision for doubtful debts to be4. Provision for doubtful debts to be
provided 5% on debtorsprovided 5% on debtors
5. Debtors for the year ended Rs. 50,000/-5. Debtors for the year ended Rs. 50,000/-

24. B.B. Existing Provision for doubtful debtsExisting Provision for doubtful debts
is more than the total of bad debtsis more than the total of bad debts
written off and to be written off newwritten off and to be written off new
provision for doubtful debts is to beprovision for doubtful debts is to be
shown in the statementsshown in the statements..

25. 1.1.Provision for the doubtful debts given inProvision for the doubtful debts given in
the trial balance (cr) Rs4000the trial balance (cr) Rs4000
2.2.Bad debts given the trial balance (Dr.)Bad debts given the trial balance (Dr.)
Rs. 600Rs. 600
3. Further bad debts to be written off3. Further bad debts to be written off
( given in the adjustment ) Rs. 800( given in the adjustment ) Rs. 800
4. Provision for doubtful debts to be4. Provision for doubtful debts to be
provided 5% on debtorsprovided 5% on debtors
5. Debtors for the year ended Rs. 50,000/-5. Debtors for the year ended Rs. 50,000/-

28. ReserveReserve for discount onfor discount on
creditorscreditors
The total creditors for the year endedThe total creditors for the year ended
31.3.2007- Rs. 450,00031.3.2007- Rs. 450,000
Create a reserve for discount on creditors @Create a reserve for discount on creditors @
2%2%