Final Accounts with Adjustments
Final accounts (Trading, P&L, Balance Sheet) prepared with adjustments present a true and fair view of business performance. This is the highest-weighted topic in BBS accounting exams (20-25 marks).
Common Adjustments Recap
Closing stock: Credit Trading, Asset in BS. Outstanding expenses: Add to expense (P&L), Current Liability (BS). Prepaid expenses: Deduct from expense (P&L), Current Asset (BS). Accrued income: Add to income (P&L), Current Asset (BS). Unearned income: Deduct from income (P&L), Current Liability (BS). Depreciation: P&L debit, Deduct from Fixed Asset (BS). Bad debts: P&L debit, Deduct from Debtors (BS). Provision for doubtful debts: P&L debit (new provision − old provision + bad debts), Deduct from Debtors after bad debts (BS). Provision for discount on debtors: P&L debit, Deduct from Debtors after provision for doubtful debts.
The Golden Rule
Every adjustment appears in TWO places in the final accounts — once in Trading/P&L and once in Balance Sheet. If you only record it in one place, the Balance Sheet won’t balance. This is the single most important principle.
Step-by-Step Approach
Step 1: Read trial balance, list all items. Step 2: Read ALL adjustments before starting — understand each double effect. Step 3: Mark items as T (Trading), P (P&L), or B (Balance Sheet). Step 4: Prepare Trading Account (direct items + closing stock). Step 5: Prepare P&L Account (indirect expenses/incomes with adjustments). Step 6: Prepare Balance Sheet (remaining items + all adjustment effects). Step 7: Verify BS balances. If not, recheck adjustments.
Special Items
Goods as free samples: Debit Advertisement (P&L), Credit Purchases (Trading). Goods destroyed by fire: Insured → Insurance Claim Dr (asset), Credit Trading. Uninsured → P&L debit (loss), Credit Trading. Manager’s commission on net profit: Calculate NP before commission, then commission = rate × NP before commission. Interest on capital: Debit P&L (expense), Credit Capital A/c.
Exam Strategy
Allocate ~45 minutes for full final accounts question. Practice 15-20 problems with varying adjustments. Always start with rough workings. Present neatly with proper formatting.
Summary
Final accounts with adjustments is the most important BBS accounting topic. Every adjustment in two places is the key principle. Systematic approach and extensive practice guarantee success.
Comprehensive Adjustment Effects Table
This is the most important table for BBS accounting exams — memorise the double effect of every adjustment:
| Adjustment | Effect in Trading/P&L | Effect in Balance Sheet |
|---|---|---|
| Closing Stock Rs 60,000 | Credit Trading A/c (reduces COGS) | Show as Current Asset |
| Outstanding Salary Rs 5,000 | Add to Salary expense (P&L debit) | Current Liability |
| Prepaid Insurance Rs 3,000 | Deduct from Insurance expense (P&L debit) | Current Asset |
| Accrued Commission Rs 2,000 | Add to Commission Received (P&L credit) | Current Asset |
| Rent Received in Advance Rs 4,000 | Deduct from Rent Received (P&L credit) | Current Liability |
| Depreciation on Machinery Rs 10,000 | Debit P&L (expense) | Deduct from Machinery (Fixed Asset) |
| Bad Debts Rs 3,000 | Debit P&L (expense) | Deduct from Debtors |
| Provision for Doubtful Debts 5% | Debit P&L (new prov − old prov + bad debts) | Deduct from Debtors (after bad debts) |
| Goods for Personal Use Rs 2,000 | Deduct from Purchases (Trading) | Deduct from Capital (add to Drawings) |
| Goods destroyed by fire (insured) Rs 5,000 | Deduct from Purchases (Trading) | Show Insurance Claim as Current Asset |
| Interest on Capital 10% | Debit P&L (expense) | Add to Capital in Balance Sheet |
Worked Example: Provision for Doubtful Debts (Most Confusing Adjustment)
Given: Trial balance shows Debtors Rs 100,000. Additional bad debts Rs 5,000. New provision required: 10% on remaining debtors. Old provision in trial balance: Rs 8,000.
Step-by-step calculation:
Step 1: Debtors after bad debts = 100,000 − 5,000 = Rs 95,000
Step 2: New provision = 10% of 95,000 = Rs 9,500
Step 3: P&L charge = Additional bad debts + New provision − Old provision = 5,000 + 9,500 − 8,000 = Rs 6,500 (debit P&L)
Step 4: Balance Sheet — Debtors shown as:
| Sundry Debtors | 100,000 |
| Less: Additional Bad Debts | (5,000) |
| 95,000 | |
| Less: Provision for Doubtful Debts | (9,500) |
| Net Debtors | 85,500 |
Exam Tips
Tip 1: Print and memorise the adjustment effects table above — it covers 90% of exam adjustments. Tip 2: Provision for doubtful debts is the trickiest adjustment. Remember: FIRST deduct bad debts from debtors, THEN calculate provision on the remaining balance, THEN compare with old provision. Tip 3: If the Balance Sheet doesn’t balance, count your adjustments — you’ve probably recorded one side but forgotten the other. Tip 4: This topic carries 20-25 marks — allocate 45 minutes and show all workings clearly.