Adjustment in Final Accounts: Transfer to Reserve

Arjun EP

Published on: September 23, 2020

Adjustment in Final Accounts

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 IN FINAL ACCOUNTS:

1	Dividend	13	Bad debts, provision and discount
2	Transfer to reserve and fund	14	Recovery of bad debts
3	Adjustment of tax	15	Goods loss by fire and insurance claim
4	Closing stock	16	Goods distribute as free sample
5	Outstanding expenses	17	Manager’s commission
6	Prepaid expenses	18	Bonus or pension to employees
7	Accrued revenue or income	19	Create reserve or fund
8	Unearned or prepaid revenue	20	Goods sold on sale or return basis
9	Depreciation on assets	21	Hidden adjustment:
10	Appreciation on assets		(a) Interest on loan or debenture
11	Written off or amortized		(b) Interest on investment
12	Purchase or sale of fixed assets		(c) Monthly rent and salary

Transfer to Reserve Fund

According to the rules of business, the firm should create reserve or consolidated fund.

Reserve or fund is the amount, which is created out of net profit to meet future contingencies.

Such funds are general reserve, reserve fund, dividend equalization fund, sinking fund, assets replacement fund etc.

General reserve fund amount can be used to overcome from unexpected financial crisis.

But, specific reserve funds are formed for specific purpose like dividend equalization fund, assets replacement fund, sinking fund, debenture redemption fund etc.

The amount of such funds can be used only in specified purpose.

Such reserves and fund are debited in profit and loss appropriation account and is shown in liability side of balance sheet.

#####

Click on link for YouTube videos
Share (Accounting for Share)	http://tiny.cc/889jkz
Share in Nepali	http://tiny.cc/k99jkz
Debentures	http://tiny.cc/yeakkz
Final Account: Class 12	http://tiny.cc/e89jkz
Final Account in Nepali	http://tiny.cc/w89jkz
Work Sheet	http://tiny.cc/579jkz
Ratio Analysis (Accounting Ratio)	http://tiny.cc/4fakkz
Fund Flow Statement	http://tiny.cc/wiakkz
Cash Flow Statement	http://tiny.cc/8gakkz
Theory Accounting Xii	http://tiny.cc/nfakkz
Theory: Cost Accounting	http://tiny.cc/tfakkz
Cost Accounting	http://tiny.cc/p29jkz
LIFO−FIFO	http://tiny.cc/dgakkz
Cost Sheet, Unit Costing	http://tiny.cc/w49jkz
Cost Reconciliation Statement	http://tiny.cc/829jkz

#####

ADJUSTMENT: 2A

The following extracted information of BC Ltd is provided to you:

Net profit of the year Rs 250,000

Board decided to set aside 10% of net profit as general reserve, Rs 50,000 to dividend equalization fund and Rs 35,000 to sinking fund before distribution dividend.

Required: Journal entry and effect in final account

Journal Entry

Date	Particulars		LF	Amount	Amount
a.	Profit and loss appropriation account (total)	Dr		110,000
	To General reserve account				25,000
	To Dividend equalization fund account				50,000
	To Sinking fund account				35,000
	(Being- different reserve and fund created out of profit)

Profit and Loss Appropriation (Retained Earning) Account

Particulars	Amount	Particulars	Amount
To General reserve	25,000	By Net profit (current profit)	250,000
To Dividend equalization fund account	50,000
To Sinking fund account	35,000
To Surplus (b/f)	140,000
	250,000		250,000

Extracted Balance Sheet

Liabilities	Amount	Assets	Amount
Reserve, fund and surplus:
General reserve	25,000
Dividend equalization fund account	50,000
Sinking fund account	35,000
Surplus	140,000