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Class 11 Financial Statements – II: cheat sheet
CBSE Accountancy. Adjustments in final accounts: closing stock, outstanding and prepaid expenses, accrued and advance income, depreciation, bad debts and provisions, commission and interest on capital.
Key ideas
- Every adjustment has two effects: one in the trading or profit and loss account, and one in the balance sheet.
- An outstanding expense is added to the expense and shown as a current liability; a prepaid expense is deducted and shown as a current asset.
- Accrued income is added to the income and shown as a current asset; income received in advance is deducted and shown as a current liability.
- Further bad debts come off debtors first; the new provision for doubtful debts is worked on the debtors that are left, and the provision for discount on what remains after that.
- The profit and loss account is charged with all the bad debts plus the new provision, less the old provision.
- The manager’s commission is worked on the profit before charging it, or on the profit after charging it, as the terms say.
- Interest on capital is debited to profit and loss and added to capital; additional capital earns interest only for the months it was in the business.
Remember
| Expense in profit and loss | paid + outstanding − prepaid |
| Prepaid part of a premium | premium × months falling in the next year ÷ 12 |
| Accrued income | income for the full year − income received |
| New provision for doubtful debts | rate × (debtors − further bad debts) |
| Charge to profit and loss | bad debts + further bad debts + new provision − old provision (+ provision for discount) |
| Debtors in the balance sheet | debtors − further bad debts − new provision − provision for discount |
| Commission on profit after charging it | profit × r ÷ (100 + r); before charging it: profit × r ÷ 100 |
| Interest on capital | capital × rate + additional capital × rate × months ÷ 12 |
Watch out
- Working the new provision on debtors before writing off the further bad debts.
- Forgetting to deduct the old provision when finding the charge.
- Using r ÷ 100 when the commission is on the profit after charging it.
Worked example
Gross profit is ₹2,97,000. The trial balance shows: salaries ₹31,500, insurance ₹30,000, interest received ₹12,750, furniture ₹80,000, debtors ₹2,04,500, bad debts ₹6,000, provision for doubtful debts ₹13,000. Adjustments: (1) salary of 3 months at ₹3,500 is outstanding; (2) the insurance was paid on 1 October for one year; (3) interest on investments of ₹1,70,000 at 10% is due for the full year; (4) depreciate furniture at 10%; (5) write off further bad debts of ₹4,500 and keep a provision of 10% and a provision for discount on debtors of 2%. Find each figure in the profit and loss account and the net profit.
Working: Bad debts and provision = ₹6,000 + ₹4,500 + new ₹20,000 − old ₹13,000 + discount ₹3,600
Answer: Salaries ₹42,000; insurance ₹15,000; depreciation ₹8,000; bad debts and provision ₹21,100; interest received ₹17,000 Net profit = ₹2,97,000 + ₹17,000 − ₹42,000 − ₹15,000 − ₹8,000 − ₹21,100 = ₹2,27,900
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