Adjustments given below trial balance must be adjusted for final account.
Adjustment entry means not adjusted while preparing trial balance.
It is also known additional information.
Almost all the adjustment entry effects dual aspect.
One is debit and other is credit.
There are a number of adjustments to be made while finalizing the financial statements.
But our discussion will be limited to the following adjustments (limited by the curriculum):
MAJOR ADJUSTMENTS:
Closing stock |
Goods loss by fire and insurance claim |
Outstanding expenses |
Goods distribute as free sample |
Prepaid expenses |
Manager’s commission |
Accrued revenue or income |
Bonus or pension to employees |
Advance income or unearned income |
Create reserve or fund |
Depreciation on assets |
Goods sold on sale or return basis |
Appreciation on assets |
Hidden adjustment: |
Written off or amortized |
(a) Interest on loan or debenture |
Purchase or sale of fixed assets |
(b) Interest on investment |
Bad debts, provision and discount |
(c) Monthly rent and salary |
Recovery of bad debts |
|
Depreciation is taken from Latin word ‘Depretium’.
De means to decrease and Pretium means price.
Therefore, depreciation means decrease in price of asset.
Depreciation is charged on tangible assets except land. Land is not depreciated.
Fixed assets are depreciated but Intangible assets are written of or amortized.
Depreciation effects profit and loss or revenue and expenditures of an organization.
It is non-cash expenses. It is debited in profit and loss account.
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Here, Amount = Rs = $ = £ = € = ₹ = Af = ৳ = Nu = Rf = රු = Br = P = Birr = Currency of your country
ADJUSTMENT: 6A
Extracted information:
Depreciation is charged on plant and machinery @ 10% p.a. (value Rs 600,000)
Depreciation is charged on furniture @ 15% p.a. (value Rs 50,000)
Required: (1) Journal entry; (2) Show in profit and loss account and balance sheet
Journal Entries
Date |
Particulars |
|
LF |
Amount |
Amount |
|
Depreciation on plant and machinery account |
Dr |
|
60,000 |
|
|
To Plant and machinery account |
|
|
|
60,000 |
|
(Being- depreciation charged on machinery 600,000@10%) |
|
|
|
|
|
|
|
|
|
|
|
Depreciation on furniture account |
Dr |
|
7,500 |
|
|
To Furniture account |
|
|
|
7,500 |
|
(Being- depreciation charged on furniture 50,000@15%) |
|
|
|
|
|
|
|
|
|
|
P&L Account
Particulars |
|
Amount |
Particulars |
|
Amount |
To Depreciation on: |
|
|
|
|
|
Plant and machinery |
60,000 |
|
|
|
|
Furniture |
+ 7,500 |
67,500 |
|
|
|
|
|
|
|
|
|
Balance Sheet
Liabilities |
|
Amount |
Assets |
|
Amount |
|
|
|
Fixed assets: |
|
|
|
|
|
Plant and machinery |
600,000 |
|
|
|
|
Less: Depn @ 10% |
(60,000) |
540,000 |
|
|
|
|
|
|
|
|
|
Furniture |
50,000 |
|
|
|
|
Less: Depn @ 15% |
(7,500) |
42,500 |
|
|
|
|
|
|
#####
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|
Accounting Equation |
|
Basic Journal Entries in Nepali |
|
Basic Journal Entries |
|
Journal Entry and Ledger |
|
Ledger |
|
Subsidiary Book |
|
Cash Book |
|
Trial Balance & Adjusted Trial Balance |
|
Bank Reconciliation Statement (BRS) |
|
Depreciation |
|
Final Accounts: Class 11 |
|
Adjustment in Final Accounts |
|
Capital and Revenue |
|
Single Entry System |
|
Non-Trading Concern |
|
Government Accounting |
|
Goswara Voucher (Journal Voucher) |
######
Accumulated depreciation is the cumulative depreciation of an asset.
Here, cumulative means total upto last year plus current year (successive additions).
Accumulated depreciation is a contra asset account.
It has credit balance that reduces the overall asset value.
Depreciation is charged on original cost or historical cost.
Carrying value of an asset is the differences between historical cost and accumulated depreciation.
At the end of an asset’s useful life, its carrying value in the balance sheet will match its book salvage value.
Here, Amount = Rs = $ = £ = € = ₹ = Af = ৳ = Nu = Rf = රු = Br = P = Birr = Currency of your country
ADJUSTMENT: 6B
Extracted trial balance is available of ABC Company on 31st December 2022:
Particulars |
Amount Dr |
Amount Cr |
Equipment |
600,000 |
|
Accumulated depreciation |
|
240,000 |
|
|
|
Additional information:
Depreciation is charged 20% on original value
Required: (1) Journal entry; (2) Show in profit and loss account and balance sheet
SOLUTION:
Journal Entries
Date |
Particulars |
|
LF |
Amount |
Amount |
|
Depreciation on equipment account |
Dr |
|
120,000 |
|
|
To Accumulated depreciation on equipment account |
|
|
|
120,000 |
|
(Being- depreciation charged on equipment 600,000@20%) |
|
|
|
|
|
|
|
|
|
|
|
Profit and loss account |
Dr |
|
120,000 |
|
|
To Depreciation on equipment account |
|
|
|
120,000 |
|
(Being- depreciation transferred to profit and loss account) |
|
|
|
|
|
|
|
|
|
|
P&L Account
Particulars |
|
Amount |
Particulars |
|
Amount |
To Depreciation on equipment |
|
120,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance Sheet
Liabilities |
|
Amount |
Assets |
|
Amount |
Provision: |
|
|
Fixed assets: |
|
|
Accumulated depreciation on equipment |
|
360,000 |
Equipment |
|
600,000 |
(240,000 old + 120,000 new) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Keep in mind
Suppose, the company has purchased equipment for $600,000 on 1st January 2020 and accounts are closed on 31st December each year. The company uses straight line method depreciation at 20% p.a. |
|
Depreciation in 2020 ($600,000 × 20%) |
120,000 |
Depreciation in 2021 ($600,000 × 20%) |
120,000 |
Depreciation in 2022 ($600,000 × 20%) |
120,000 |
|
|
Now, Accumulated depreciation upto 2020 = 120,000 + 120,000 + 120,000 = $360,000 |
Sometimes, company’s fixed assets will change in their market prices.
When this occurs, the company must change its accounts by using either the cost method or revaluation techniques.
Revaluation of a fixed asset may either increase or decrease its value.
There are two methods for revaluation of fixed assets; they are cost method and revaluation method.
Cost method = Historical cost – Accumulated depreciation
Revaluation method = Cost value ± Increase or Decrease
Here, Amount = Rs = $ = £ = € = ₹ = Af = ৳ = Nu = Rf = රු = Br = P = Birr = Currency of your country
ADJUSTMENT: 6C
Extracted trial balance is available on 31st December:
Particulars |
Amount Dr |
Amount Cr |
Plant and machinery |
645,000 |
|
Land and building |
725,500 |
|
|
|
|
Additional information:
Plant and machinery was revalued at $600,000
Land and building was revalued at $800,000
Required: (1) Journal entry; (2) Show in profit and loss account and balance sheet
SOLUTION:
Journal Entries
Date |
Particulars |
|
LF |
Amount |
Amount |
|
Depreciation on plant and machinery account |
Dr |
|
45,000 |
|
|
To Plant and machinery account |
|
|
|
45,000 |
|
(Being- plant and machinery revalued from 645,000 to 600,000 |
|
|
|
|
|
|
|
|
|
|
|
Land and building account |
Dr |
|
74,500 |
|
|
To Appreciation on land and building account |
|
|
|
74,500 |
|
(Being- land and building revalued from 725,500 to 800,000 |
|
|
|
|
|
|
|
|
|
|
P&L Account
Particulars |
|
Amount |
Particulars |
|
Amount |
To Depreciation on plant and machinery |
|
45,000 |
By Appreciation on land and building |
|
74,500 |
|
|
|
|
|
|
|
|
|
|
|
|
Balance Sheet
Liabilities |
|
Amount |
Assets |
|
Amount |
|
|
|
Fixed assets: |
|
|
|
|
360,000 |
Plant and machinery |
645,000 |
|
|
|
|
Less: Depreciation |
(45,000) |
600,000 |
|
|
|
Land and building |
725,500 |
|
|
|
|
Add: Appreciation |
+ 74,500 |
800,000 |
|
|
|
|
|
|
***********
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