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Discy Latest Questions

  1. This answer was edited.

    For anyone who is not familiar with the term 'closing stock', in brief, it refers to the unsold goods held at the end of the financial year. To ascertain the true financial position of a company it is necessary to adjust the closing stock at the end of an accounting year. Adjustment entry of closingRead more

    For anyone who is not familiar with the term ‘closing stock’, in brief, it refers to the unsold goods held at the end of the financial year. To ascertain the true financial position of a company it is necessary to adjust the closing stock at the end of an accounting year.

    Adjustment entry of closing stock

    The closing stock generally does not appear in the trial balance and is seen as an adjustment entry. We need to pass an adjusting entry before the preparation of final accounts. It is important to note that an adjustment entry is always recorded twice in the books of accounts therefore, the two ways of recording the same for closing stock are as follows:

    1. Credit side of the trading account.

    2. The asset side of the balance sheet.

    Example

    The closing stock of ABC Ltd. amounts to 40,000. The journal entries in the books of the company are as follows:

    PARTICULARS AMOUNT
    Closing stock a/cDebit40,000
    To Trading a/cCredit40,000

    (being closing stock adjusted)

    Placement of closing stock in the trading a/c

    trading a/c

    Placement of closing stock in the balance sheet

    balance sheet

    Note: Sometimes, adjusted purchases are given in the trial balance which indicates that the opening as well the closing stock have been adjusted through purchases. It is important to note here that the closing stock will only be recorded on the asset side of the balance sheet and will not appear in the trading a/c.

    Hope this helps.

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  1. This answer was edited.

    Before answering this question you should first have a glance over the concept of interest on capital. Interest on Capital An organisation or an entity is considered as separate from its partners or proprietor or shareholders for that matter. Since the capital brought in by the partners and proprietRead more

    Before answering this question you should first have a glance over the concept of interest on capital.

    Interest on Capital

    An organisation or an entity is considered as separate from its partners or proprietor or shareholders for that matter.

    Since the capital brought in by the partners and proprietor is an obligation for an entity thus the interest payable to the partners or proprietor for that matter is considered as an expense of the firm or an entity. Had not the partners or sole owner brought in the capital the firm or the organisation would have borrowed such amount externally and so, it would have to incur a certain financial charge.

    Adjustment of Interest on Capital in the Financial Statement

    Where the capital is introduced by the sole proprietor the transaction will be journalised as-

    Interest when due –

    Journal Entry

    Interest on capital transferred to profit and loss statement-

    Journal entry at the time of transferring the interest to income statement

    Thus, ultimately the profit of the firm is reduced as such interest is treated as an expense and hence debited in the profit and loss statement and it is shown in the balance sheet by increasing the capital on the liability side of the balance sheet by that amount.

    For Example,

    Mr John is a dealer in the smartphone has introduced capital worth 1,00,000 and the firm shall pay interest @ 6% p.a. at the end of the year.

    It will be displayed in the profit and loss statement as –

    Adjustment in the income statement

     

    It will be displayed in the balance sheet as –

    Adjustment in the financial statement

    Interest on capital is provided out of profits only. Thus in case of loss, no interest is provided.

    In case of a partnership firm – 

    If the firm maintains Fluctuating Capital i.e all entries in respect of salary, interest, profit earned and drawings of partners are transacted through the partner’s capital A/c.

    Thus, where an entity maintains only partners capital account the interest on capital shall be journalised as –

    Interest on capital due –

    Journal Entry for interest on capitalInterest on capital transferred to profit and loss appropriation statement –

    Adjustment in an income statement

    Some entities prefer showing the partner’s capital accounts with the same old figures i.e no entries in respect of salary, interest, profit earned and drawings of partners are transacted through the partner’s capital A/c.

    A separate account is to be opened for the same called “Partner’s Current Account”. The interest on capital here shall be calculated only on fixed capital.

    In this case, such a transaction shall be journalised as –

    Interest due on capital
    Interest on capital when an entity maintains partners current account

    Interest on capital transferred to profit and loss appropriation statement –

    Adjustment in an income statement

    Thus, ultimately the profit of the firm is reduced as such interest is treated as an expense and hence debited in the profit and loss appropriation statement and it is shown in the balance sheet by increasing the partner’s capital/ current a/c on the liability side of the balance sheet by that amount.

    The example given below will be of some help to interpret the above para

    An entity has 2 partners – Alex and Anna at the beginning of the year both have introduced a capital of 100,000  each and it was agreed in the partnership deed that the partners will charge interest @ 12% p.a. every year at the end of the year.

    Hence, the interest of 24,000 (100,000 x 12% p.a x 2 partners) shall be transacted in the balance sheet and Profit and loss statement as –

    If the firm maintains partners capital account only-
    Adjustment in profit and loss appropriation statement

    Extract of Profit and Loss Appropriation Account-

    Adjustment in the statement of accounts

    Adjustment in a balance sheet

    A snippet of the balance sheet is given below

    Interest adjustment in the balance sheet when the entity maintains only capital account

    If the firm maintains partners capital account and partners current account

    Adjustment in profit and loss statement

    Extract of Profit and Loss Appropriation Account-

    Adjustment in Financial Statements

     

    Adjustment in a balance sheet

    A snippet of the balance sheet is given below

    Adjustment in partners current account on liability side of balance sheet

    I have tried simplifying it as much as I could. I hope this helps.


    Aastha Mehta.

     

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  1. This answer was edited.

    Adjustment in final accounts Adjustment of bad debts is often a tedious task for the students which ultimately leads to an error and false representation of the financial position of the business. They are adjusted in two ways depending on their record in the books of accounts, which is as follows:Read more

    Adjustment in final accounts

    Adjustment of bad debts is often a tedious task for the students which ultimately leads to an error and false representation of the financial position of the business. They are adjusted in two ways depending on their record in the books of accounts, which is as follows:

    1. Treatment of bad debts before preparation of trial balance

    As a debtor fails to pay the due amount his account is credited and closed as well as a new account is opened known as the Bad debts account.

    In the trial balance:
    The net amount of bad debts incurred during the financial period and the Sundry debtors excluding the amount of bad debts appear as a separate item in the Trial balance on the debit side.

    In the Income statement or the Profit and loss a/c:

    Bad debts being an expense are recorded under operating expenses in the income statement or on the debit side of the Profit and loss a/c.

    Journal entries for adjustment of bad debts:

    Bad debts a/cDebit
    To Sundry debtors a/cCredit

    (being bad debts written off)

    Profit and loss a/cDebit
    To Bad debts a/cCredit

    (being bad debts transferred to p/l a/c)

    2. Treatment of bad debts after the preparation of trial balance

    Sometimes the amount of bad debts may be mentioned as an adjustment item outside the Trial balance. These types of debts are often referred to as further bad debts and have not yet been written off. To provide a true financial position of the company it is necessary to include these bad debts while preparing the Final accounts.

    In the profit and loss a/c:

    They are added to the already written off bad debts and appear on the debit side of the profit and loss a/c.

    In the balance sheet:

    They are deducted from the adjusted sundry debtors on the asset side of the balance sheet.

    Journal entry for adjustment of further bad debts:

    Bad debts a/cDebit
    To Sundry debtors a/cCredit

    (being bad debts written off)

    Example:

    The extract of the trial balance of XYZ Ltd. is as follows:

    PARTICULARSDEBITCREDIT
    Sundry debtors50,000 
    Bad debts8,000 

    XYZ Ltd. sells goods to a retailer at 50 days credit. However, after 50 days, the company realizes that the retailer has been declared insolvent and only an amount of 4,000 will be received against the total amount of 8,000. The adjustment in the final accounts is as follows:

    Bad debts a/cDebit4,000Debit all expenses and losses
    To Retailers a/cCredit4,000Credit the giver

    (being amount irrecoverable from the retailer)

    Extract of Profit and loss a/c

    PARTICULARSAMOUNTPARTICULARSAMOUNT
    To Bad debts a/c        8,000   
    (+) further bad debts  4,00012,000  

    Extract of balance sheet

    LiabilitiesAmountAssetsAmount
    Sundry debtors           50,000
    (-) Further bad debts   4,000
    46,000

    Hope this helps.

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