How to solve difficult adjustments in Financial Accounts

By

Professors Augustin Amaladas and Shanthi Augustin

M.Com(Loyola, Chennai)., AICWA

These slidesAre prepared

Only to Clarify major

Doubts To studentsAnd staff.

Only Difficult

Adjustments are

explained

Exclusively to CA ICWA,CS Students or others who wants to learn Accounts thoroughly

CA CPT, ICWA entrance,ACS entrance students should read this

Alternative work is rest

Why does Equity shares and fixed assets appear first in the Balance

sheet • The balance sheet is prepared in order. Left hand

side liabilities and right hand side Assets. If business comes to an end the liability which is paid last is share capital. The last asset which is sold out will be fixed asset. Among fixed assets goodwill(good name) is sold out last.No one wants to sell one’s name unless everything is lost.The order of arrangement is known as order of permanence.

• What is the Order of Liquidity?

Order of Liquidity?

• The liability which is disposed off first comes first in the balance sheet. The asset which is used to pay liability first appears first in the assets side.

• Therefore cash appears first in the balance sheet asset side. And Creditors should appear in the liability side first.

• The above two orders are known as marshalling

Income tax paid by sole proprietor and partnership business-Journal entry?

• Income tax does not recognise sole proprietor or firm as a unit but the individuals who run the organisation are recognised.

• Income tax is a direct tax. Direct taxes such as Income tax, wealth tax are to be paid by the individual who runs such organisation.It is a personal liability even such incomes from business.

• If business money is used for personal use of paying tax, then such payment to be treated as drawings.

• Journal entry: Debit drawings and credit Cash.

• Note: do not debit incometax account.

• If you debit income tax account it means that its treated as business expenditure. It is wrong in this case.

If Income tax paid by company?

• Company is a separate legal entity.The payment of tax is the liability of the company. It is not the liability of Shareholders. SHARE HOLDERS ARE DIFFERENT FROM COMPANY.

• It is a business expenditure.• Journal entry: Debit Income tax account

and credit Cash account.

How do you deal indirect taxes?

• Indirect taxes such as sales tax, excise duty, Octroi duty, import duty, export duty are actually imposed on the individual who buys such article. It is not the responsibility of the individuals who run the business but by the business itself. It is a business expenditure.

• Journal entry: Debit sales tax a/c Credit cash a/c

5.Double entry / Single entry

• Is Accounting based on business concept or religious concept?

It is based on religious concept

• Giving first and receiving later.• Giving cash receiving machinery• God is an accountant for every business. Who ever

gives given credit.whoever receives given debit. What ever goes out of you to be credited because god will reward you.What ever comes to you is given debit because god will take away from you.

• Giving is right hand function.Receiving is left hand function.

Rules of acccounting

• Personal rule/Account-supplier debtors, owner, banker, outstanding wages

• Real rule/Account- cash, bank, building, furniture, goodwill, patent rights

• Nominal rule/account: income and expenditure: salary, rent , insurance, commission, internet expenses, cell phone expenses.

Personal rule

• Debit the receiver • credit the giver• Example: Computer chips purchased on credit

from wipro• Here credit Wipro as Wipro is the giver of

computer.• Sold goods to Meena• Meena is the receiver-debit

Exercise• 1.Amount collected from debtors?• 2.Amount deposited to bank?• Answer 1: two accounts to be selected.A) cash because

it comes in B) debtors given money.The giver to be given credit- PERSONAL RULE.

• Cash related to real rule because we can see.• Therefore Journal entry Is: Debit cash, credit debtors.2. Banker is the receiver –related to personal rule therefore

debit bank. Cash goes out –related to real rule-credit cash.

Real rule

• These are the accounts of assets and liabilities

• Rule: debit what comes in • Credit what goes out

Excercise

• 1.Goods supplied for cash

• 2.Cash withdrawn from bank

• 3.Cash withdrawn from bank for personal use

• 4.Land purchased by giving a cheque

• 5.Building sold on credit

• Answer: 1.Goods and cash are two accounts required. Person who supplied is not important as it is a cash transaction.Both are related to real rule.

• JE: Goods A/c debit Cash A/c credit2.Cash and bank are two accounts. Both are related

to real rule.JE: Cash a/c debit Bank a/c creditNote: Cash withdrawn does not mean

drawings.Only when cash withdrawn for personal use we consider it as drawings.

• 5. Building sold on credit.

• He is not a dealer in building.If he is not a dealer in building we can not consider it as goods. Only when they are goods they can be taken to sale(Revenue income) otherwise they should be removed from capital expenditure.

• JE:The person who buys a/c debit

• Building account credit.

• 3. Cash with drawn for personal use:owner and cash is important. Owner is personal rule and cash is related to real rule.Debit the receiver, therefore debit drawings and credit bank as banker is the giver of cash.

• JE: Drawings a/c debit• Bank a/c credit• 4.Land purchased by giving a cheque:• Land and bank are two important.Both are related

to real rule. Debit what comes in and credit what goes out.

• JE: Land A/c debit• bank A/c credit

Nominal rule

• Related to Expenses and income

• Rule: Debit all expenses and losses

• Credit all incomes and gains

Exercise• Rent paid Rs 50,000(Rent debit and cash credit)• Wages paid Rs.1,00,000(wages debit and cash credit)• Wages outstanding-Rs.60,000(wages a/c debit and

outstanding wages to Mr.X to be credited)• Commission received-25,000(Cash A/c debit and

commission a/c to be credited)• Discount allowed to customer – Rs.1,000(Discount is

related to nominal rule.debit discount and credit debtors who had given cash)

• Telephone bills paid-Rs.2500(Telephone a/c debit and cash to be credited)

• Shares issued at premium-Rs.2,00,000(Cash a/c debit and share premium to be credited as it belongs to nominal rule)

Suitable questions to pass journal entry

• If cash transaction, person is not important

• Every birth of an account there is a death of the account

• Ask what comes in?

• Or what goes out?

What is the journal entry for bad debts?

• Bad debt a/c debit

• to debtors a/c

• Bad debt follows nominal rule. Debit all expenses and losses and credit all income and gains.

• Debtors account follow personal rule. Debit the receiver and credit the giver.

Journal entry for provision for bad and doubtful debts?

• Profit and loss account Debit

• credit provision for bad and doubtful debts

• Reasons:- All provisions are taken out of profits. It means profit is reduced and provision to be increased. All provisions are future expected liabilities.

Rent and rent outstanding exp

• JE: Rent debit and cash credit• Rent outstanding:• Rent debit and rent outstanding to some

one(say Mr.X )credit.• Rent appears in the profit and loss

account debit side• Rent outstanding appears in the balance

sheet under the head current liabilities.

What is contingent liability?

• Liability which may or may not happen depends on the future situations

• Example:1. Court case against the company

• 2. contract yet to be completed.

• No journal entry as it is not a real liability on the date of balance sheet.

Final Accounts Adjustments

• Domestic house hold Expenses(Drawings a/c debit and cash credit)

• Income tax refund( It is a personal income.If it is taken to the business then cash a/c debit and capital a/c credit)

• Income from house property( cash a/c debit and capital credit) as personal income has been taken to business.

• Un expired insurance(Unexpired insurance debit(asset) insurance premium a/c credit)

• Income received in Advance(It is a liability.debit income a/c and credit income received in advance a/c credit)

• Interest on Capital( it is an expenditure. Interest on capital a/c debit and capital account credit)

• Provision on Doubtful debts(Profit and loss a/c debit and provision for bad and doubtful debts credit)

• provision for Discount on debtor( Profit and loss account debit and provision for discount on debtors credit)It is because all provisions are taken from profit and loss account.

• Deferred revenue expenditure((HUGE Revenue expenditure incurred during the current year but can not be treated as one year expenditure as the benefit will come for more than a year.)

• JE: Deferred revenue expenditure a/c debit and cash to be credited.

Final Accounts Adjustments

• Reserve Fund( all reserves taken from profit. debit profit and loss a/c and credit Reserve fund)

• Goods Distributed as free sample( goods with drawn other than trading activity: Advertisement a/c debit and purchase a/c credit)

• Manager’s Commission( he is entitled to receive commission. Therefore: Manager’s commission a/c debit and Outstanding commission a/c credit.

Bad debts written off recovered

• Once bad debts written off means that it is completely removed from debtors and transferred to profit and loss account as a loss.There is no such account is seen any where in the books.

• If recovered such recovery does not affect debtors but affects profit and loss account

• JE: Cash a/c debit• Bad debts recovery or profit and loss a/c

credit

Goods destroyed due to fire and insurance company partly accepted

• Goods which are meant for trading destroyed. Operating activity becomes non operating activity or extraordinary activity.

• JE: Insurance company a/c debit(like a debtor or asset)

loss of stock a/c debit

Trading a/c or purchase account

What do you mean by adjustment accounting point of view?

• It means pass a fresh journal entry.• It means any item appears in the trial balance means

that we had already passed journal entry. That is why such items appear only once in the final account.

• Since we pass journal entry for adjustments they appear twice in the final accounts.

• The head of the account is important when you pass a fresh journal entry for adjustments.Example:rent outstanding means rent account. Insurance prepaid means insurance account, interest due means interest account,

If closing stock appears in trial balance where should appear in the final accounts?

• If it appears in the trial balance means we had passed journal entry for such stock and adjusted with purchases to calculate cost of goods sold. Therefore it should not appear in the trading account. Being an asset it should appear in the Balance sheet.

Out standing expenses(rent) given in the trial balance?

• It means it is already journal entry passed and adjusted with rent account(added to rent)

• Do not adjust with rent in profit and loss account.

• Take such item to balance sheet as a liability.

How do you deal advanced income tax paid by proprietor?

• Income tax paid itself is considered as drawings, therefore advanced income tax also to be considered as drawings onle

• JE: Drawings a/c debit and cash a/c to be credited.

Bad debts given in the trial balance?

• It means journal entry was passed and adjusted against debtors(head). Do not adjust such bad debts against debtors in the balance sheet.

• As a loss it should appear in the profit and loss account.

• If such bad debt is given in the adjustments?

• It means pass a fresh journal entry for the new bad debt and to be adjusted with the head of such account(Debtors).

• Reduce such bad debt from debtors in the balance sheet before calculating provision for bad and doubtful debts.

• As a new bad debt add to the existing bad debts which is given in the trial balance which will appear in the profit and loss account.

Do we deduct discount allowed given in the adjustment from debtors before calculating

provision for bad and doubtful debts?

• Yes. It is because it is given in the adjustment and also it is certain that such debtors already gone out of books of debtors. There is no doubts about it. The provision is always calculated only on debtors who are shaky.

If goods sent out on Higher purchase how do you deal?

• If on the balance sheet date if such goods are with the customer divide the goods into two

Cost Profit

Add to Closing stock in trading a/c and

Balance sheet

+= Debtors

Reduce from debtors

What is the JE when goods are received by consignee from

consignor?• No journal entry. Why?• Owner ship is not transferred from consignor to

consignee. Even though the goods are physically in the hands of consignee but there is no transfer of goods taken place from consignor to consignee.Owner ship should be transferred to pass journal entry.

• The concept is that one person can not transfer to oneself.

When branch sends goods to head office or vice versa, what is

the journal entry?

• No journal entry as ownership is not transferred.In fact there can not be any sales tax, income tax.

• One person can not earn profit by transferring to one self.Unless goods are transferred to third party no profits can be realised.

If sales return given in the adjustment?

• It means we have to pass a fresh journal entry.

• JE: Sales a/c Debit

Debtors account credit

We have to reduce sales and debtors once goods are returned.

What is the JE when normal loss occur?

• No Journal entry. Why.• Cost per unit will be inflated.You make

customer to bear the total cost.• If abnormal loss occurs why do we pass

journal entry?• It is because some portion will be recovered

from insurance and some portion will be the loss to be written of against profit.

• If you are satisfied please send SMS to others to share your joy.

• Send your comments to the following address. Periodically I come out with other topics.See my web periodically.

• aug_bang@yahoo.com

• www.augustin.co.nr

My next topic is rectification of errors

• See with in short period of time in my web

• www.augustin.co.nr.

• It is a free web for globe.