final accounts adjustments notes by faisal yafai lecturer in commerce . TALENT academy

djustments are nothing but transactions relating to the business which have not been journalised. Therefore, to deal with adjustments one needs to understand the journal entry to be recorded if the transaction representing the adjustment is to be recorded in the books of accounts.
The adjustments relating to outstanding/prepaid expenses and pre-received/receivable incomes are dealt with here.

Outstanding Expenses

At the end of the accounting period, there may be expenses which have become due but have not yet been paid. If the organisation is following the mercantile system of accounting, these expenses are to be brought into account.

• Debit » Expenditure a/c

  "Expenditure a/c" is a nominal account with a debit balance. The balance in the "Expenditure a/c" generally indicates the total amount paid on account of the expenditure during the current accounting period. To bring the expenditure that has not yet been brought into account into the books, the relevant expenditure account has to be debited.
  [Expenditure a/c – Nominal a/c – Debit all Expenses and Losses.]

• Credit » Expenses Outstanding a/c

  "Expenses Outstanding a/c" is a personal account with a credit balance. The balance in the "Expenses Outstanding a/c" indicates the amount that is owed by the organisation on account of the expenditure unpaid. The amount of expenditure that has not yet been paid is a liability for the organisation. The persons to whom the organisation owes is its creditor. As such, the amount of expenditure outstanding that has not yet been taken into the books is credited to the "Expenditure Outstanding a/c."
  [Outstanding Expenditure a/c – Personal a/c – Credit the benefit giver.]

Journal in the books of M/s ____ for the period from 1st July 2005 to 30th June 2006
Date	V/R No.	Particulars		L/F	Debit Amount (in Rs)	Credit Amount (in Rs)
1st to 30th	–	Expenditure a/c       To Expenditure Outstanding a/c	Dr	– –	xxx	xxx
		[For the amount expenditure relating to the current period, not yet paid brought in to the books.]

Adjustment

The amount of expenditure outstanding is to be

1. Added to the relevant expenditure on the debit side of the "Trading a/" or "Profit & Loss a/c".
2. Shown as a liability on the liabilities side of the balance sheet.

Explanation/Illustration » Hide/Show

Expenses Prepaid

At the end of the accounting period, there may be expenses which have been paid in advance. These are expenses which are paid in advance and would be adjusted in the relevant expenditure during the subsequent accounting periods. Advances paid are treated in a different manner from expenses prepaid, the difference
being that the advances are recoverable whereas expenditure prepaid are realised by adjusted them in the amounts to be paid in the future towards the expenditure.

• Credit » Expenditure a/c

  "Expenditure a/c" is a nominal account with a debit balance. The balance in the "Expenditure a/c" generally indicates the total amount paid on account of the expenditure during the current accounting period. On the assumption that the payments towards the expenditure include the expenditure prepaid, the expenditure has to be adjusted (reduced) to ascertain the actual expenditure chargeable for the current period.
  "Expenditure a/c" shows a debit balance and as such to reduce it, the "Expenditure a/c" has to be credited.
  [Expenditure a/c – Nominal a/c – Credit all Incomes & Gains.]

• Debit » Expenses Prepaid a/c

  The prepaid expenditure is indicative of an amount that is owed to the organisation by the person or organisation to whom it has been prepaid. The persons who owe to the organisation are its debtors. Thus amount of expenditure prepaid is debited to the "Expenses Prepaid a/c".
  [Expenditure Prepaid a/c – Personal a/c – Debit the benefit receiver.]

Journal in the books of M/s ____ for the period from 1st July 2005 to 30th June 2006
Date	V/R No.	Particulars		L/F	Debit Amount (in Rs)	Credit Amount (in Rs)
1st to 30th	–	Expenditure Prepaid a/c       To Expenditure a/c	Dr	– –	xxx	xxx
		[For the amount expenditure relating to the subsequent periods paid in advance being adjusted from the current period expenditure.]

Adjustment

The amount of expenditure prepaid is to be

1. Deducted from the relevant expenditure on the debit side of the "Trading a/" or "Profit & Loss a/c".
2. Shown as an asset on the assets side of the balance sheet.

Explanation/Illustration » Hide/Show