Class 11 Accountancy Chapter 10 Financial Statements II
NCERT Notes for Class 11 Accountancy Chapter 10 Financial Statements II, (Accountancy) exam are Students are taught thru NCERT books in some of state board and CBSE Schools. As the chapter involves an end, there is an exercise provided to assist students prepare for evaluation. Students need to clear up those exercises very well because the questions with inside the very last asked from those.
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NCERT Notes for Class 11 Accountancy Chapter 10 Financial Statements II
Class 11 Accountancy Chapter 10 Financial Statements II
Financial Statements II
Final accounts with adjustment
- While preparing final accounts at the end of every accounting period, all expenses and income should be taken into consideration.
- The expenses of current year may be still payable or the expenses of next year might have been paid this year.
- Sometimes, income of the current year remains still receivable as well as the income of the next year might have been received in advance would not have been recorded in the books yet.
- According to accrual concept of accounting all these items should be recorded in the financial statements in order to get correct financial position and profit or loss.
- This process is called adjustments.
- The journal entries passed for the adjustments or recording all items which needs alteration are called adjustment entries.
The items which usually need adjustments are:
- Closing stock
- Outstanding Expense
- Prepaid Expense
- Accrued Income
- Income Received in Advance
- Depreciation
- Bad Debts
- Provision for doubtful debt
- Provision for discount on debtors
- Provision for discount on creditors
- Interest on capital
- Interest on Drawings
- Deffered Revenue Expenditure
- Managers Commission
- Stock Destroyed or Damaged by fire
- Goods sent for approval basis
- Goods distributed as free sample
1- Closing stock
If the closing stock is not given in the trial balance and shown as an additional information outside the trial balance.
The adjustment entry will be
Closing stock a/c Dr
To Trading a/c
Effect of the adjustment
1- Closing stock will be shown on the asset side of the balance sheet
2- In trading account the amount of closing stock will be credited.
If closing stock is given in trial balance
This means opening stock and closing stock are adjusted through purchase account. in this case opening stock will not appear in trial balance.
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The adjustment entry will be |
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Closing stock a/c To Purchase a/c |
Dr |
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Purchase a/c To Closing stock |
Dr |
Effect of the adjustment
1- Closing stock will be shown on the asset side of the balance sheet
2-Outstanding Expense
Expenses which have been incurred during the year and whose benefit has been derived during the year but the payment has not been made are called outstanding expenses or unpaid expenses. The adjustment entry will be
Expense a/c Dr
To Outstanding expense a/c
Effect of the adjustment
- Add to the respective expenses and shown on the debit side of the trading and profit and loss account
- It will be shown on the liability side of the balance sheet
3-Prepaid expense
The expenses which have been paid in advance, whose benefit will be available in future are called unexpired or prepaid expenses.
The adjustment entry will be
Prepaid expense a/c Dr
To expense a/c
Effect of the adjustment
- Prepaid expense will be deducted from respective expenses and shown in the debit side of the Trading and profit and loss a/c
- In the balance sheet it will be shown on the asset side.
4- Income earned but not received or Accrued Income
An income which has been earned but not received during the accounting year is called accrued income.
Adjustment entry
Accrued Income a/c Dr
To Income a/c
Effect of the adjustment
- Accrued income will be added to the respective income and shown on the credit side of the profit and loss a/c.
- It will be shown on the asset side of the Balance Sheet.
5- Income Received in advance
Income received but not due is called income received in advance or unearned income.
Adjustment entry
Income a/c Dr
To Income received in advance a/c
Effect of the adjustment
- It should be deducted from the concerned income and shown in the creditside of the profit and loss account.
- In Balance Sheet it is shown on the liability side.
6- Depreciation
Depreciation means the decrease in the Value of asset. It is considered as a loss.
Adjustment entry
Depreciation a/c Dr
To Asset a/c
Effect of the adjustment
1- It is shown on the debit side of the profit and loss account as a separate item.
2-In balance sheet the amount of depreciation is deducted from concerned asset.
7- Bad Debt
Any irrecoverable portion of sundry debtors is termed as bad debt. Bad debt is a loss.
Adjustment entry
Bad debt a/c Dr
To Sundry Debtors
At the end of the accounting period bad debt account will be transferred to profit and loss account.
Profit and loss a/c Dr
To Bad Debt a/c
Further Bad debt
If a debt becomes bad after the preparation of trial balance it is called further bad debt.
Effect of adjustment
- If the bad debt is given in trial balance only
- The amount of bad debt should be shown on the debit side of profit and loss account as a separate item.
- If the bad debt is given in trial balance and further bad debt is given in adjustment.
- In profit and loss account further bad debt should be added to bad debts given in trial balance and shown on the debit side of the profit and loss account.
- In Balance Sheet the amount of further bad debt is deducted from sundry debtors.
8- Provision for bad debt/ doubtful debt
The businessman finds on the last day of accounting year that certain debts are doubtful. It cannot be written off as bad because non-recovery of such amount is not certain. In order to meet this type of losses a provision against sundry debtors is created. It is called provision for doubtful debt. Or the amount debited to the profit and loss account in anticipation of future bad debt is called provision for doubtful debt.
Adjustment entry
Profit and loss a/c Dr
To Provision for bad debt a/c
Effect of adjustment
1-If the provision for bad debt is given in trial balance (old provision) and adjustments
(new provision)
- In profit and loss a/c new provision is added to bad debt and old provision is deducted
- In balance sheet new provision is deducted from sundry debtors
2- If provision for bad debt is given in adjustments only ie. new provision.
a- In profit and loss a/c new provision is added to bad debt a/c
b- In balance sheet new provision will be deducted from sundry debtors.
9-provision for discount on debtors
A provision made in the profit and loss a/c of the year for an anticipated amount of discount to be paid to the debtors in the subsequent year is called provision for discount on debtors.
Adjustment entry
Profitand loss a/c Dr
To provision for discount on debtors
Effect of the adjustment
- In profit and loss a/c provision for discount on debtors should be debited
- In balance sheet the amount of discount on debtors should be deducted from sundry debtors
10- Provision for discount on creditors
Provision is made in the profit and loss account of the year for an anticipated amount of discount to be received from the creditors in the subsequent year. It is called provision for discount on creditors. It is an income
Adjustment entry
Provision for discount on creditors a/c Dr.
To Profit and loss a/c
Effect of the adjustments
- In profit and loss account it should be credited
- In balance sheet it should be deducted from sundry creditors.
11. Interest on capital
As per the business entity concept capital invested by the owner in the business considered to be a loan given by him to the business. So the owner should get interest on the amount he invested. It is called interest on capital. It is an expense to the business.
Adjustment entry
Interest on capital a/c Dr.
To Capital a/c
Effect of adjustment
1- In profit and loss account it should be debited as a separate item.
2- In balance sheet interest on capital added to capital.
12-Interest on drawings
Drawings are the amount withdrawn by the proprietor for his personal use from the business. It is considered as the loan given by the business to the proprietor. So the owner should give interest for the amount he withdrawn from the business. It is called interest on drawings. It is a profit to the business.
Adjustment entry
Drawings a/c Dr
To Interest on drawings
Effect of the adjustment
- It is credited to the profit and loss account as a separate item.
- In Balance sheet it should be deducted from capital.
13- Deferred Revenue Expenditure
Deferred revenue expenditure is a class of revenue expenditure, the benefit of which is expected to be received for more than the particular year in which it is incurred.
Adjustment entry
Advertisement a/c Dr
To Cash a/c
Profit and loss a/c Dr
To Advertisement a/c (current year portion)
Effect of Adjustment
- In profit and loss a/c current year portion should be debited.
- In Balance sheet the unwritten portion should be shown on the asset side.
14. Managers commission
The commission given to the manager against profit is called managers commission.it is calculated on a fixed percentage on profit. Such commission may be
- Before charging such commission
- After charging such commission
Adjustment entry
Managers commission a/c Dr
To outstanding commission a/c
Effect of the Adjustment
- In profit and loss a/c manager’s commission should be shown on the debit side as the last item.
- In Balance sheet it should be shown on the liability side.
- Calculation of manager’s commission before charging such commission
Calculation of manager’s commission before charging such commission
Calculation of manager’s commission after charging such commission
Notional profit x Rate of commission
100 + Rate of commission
Notional profit
For calculating the manager’s commission we should find out the difference between debit side and credit side of profit and loss a/c. This difference is called notional profit.
15– Stock destroyed or damaged by fire.
When goods are damaged or destroyed by fire the entire loss is transferred to trading account.
a- If the stock is not insured
Adjustment entry
Goods lost by fire a/c Dr
To Trading a/c
Profit and loss a/c Dr
To Goods lost by fire
Effect of adjustments
- The amount of loss should be shown on the credit side of trading account.
- In profit and loss account it should be shown on the debit side.
b- If the stock is insured and the insurance company admitted the claim fully.
Adjustment entry
Goods lost by fire a/c Dr
To trading a/c
Effect of Adjustment
- It should be shown on the credit side of the trading account.
- In balance sheet the amount of claim should be shown on the asset side as insurance claim.
c- If the stock is insured and the insurance company admitted the claim partially.
Adjustment entry
Goods lost by fire a/c dr
To Trading a/c
Insurance co. a/c Dr (amount received)
Profit and loss a/c Dr (balance amount)
To Goods lost by fire a/c
Effect of the adjustment
- in trading account the total value of loss should be credited (total loss- amount received from insurance co.) and in profit and loss account, that part of stock which is not insured should be debited.
- in Balance sheet the amount received from insurance company should be shown on the asset side as insurance claim.
16- Goods sent for approval basis
Sometimes goods are sent to customers on approval basis ie. Sale or return basis. If they approve before the date of preparation of financial statement it will become sale. No accounting treatment is required in such a case. But if it remains unaccepted till the end of the accounting period, the same should be regarded as the stock.
The adjustment entry
Sales a/c Dr (stock price)
To Debtors.
Stock a/c Dr
To Trading a/c
Effect of adjustment
- In trading account the amount should be deducted from sales (selling price) and the cost of goods lying the customer should be added to closing stock.
- In balance sheet deduct the amount of goods sent from sundry debtors and add the cost price with closing stock as stock with customers.
17- Goods distributed as free sample
In order to promote sale goods may be distributed to customers as free sample. The cost of such expense is treated as advertisement expense.
The adjustment entry
Advertisement a/c Dr
To Purchase a/c
Effect of adjustment
1- In trading account it should be deducted from purchase and in profit and loss account it should be shown on the debit side as free sample. No adjustment in balance sheet.