Adjustments to Final Accounts 🧾

Adjustments include:

• Closing stock 📦
• Arrears and accruals (incomes and expenses) 💰
• Prepaid or paid in advance (income and expenses) 💳
• Bad debts and provision for bad debts 🚫💵
• Depreciation 📉
• Drawings in kind 🎨

Each and every adjustment must be treated twice, either in:

• Trading account and balance sheet 📊
• Trading account and profit and loss 📈
• The profit and loss account and balance sheet 📉

1. Closing Stock (Inventory) 📦

These are unsold goods at the end of the trading period. It appears below the trial balance and is recorded at the cost price.

Accounting treatment 🧾

• Subtract closing stock from the stock available for sale in the trading account (Stock available for sale – closing stock = cost of sales). ➖
• Add the same figure for closing stock to the list of current assets in the Balance Sheet. ➕

2. Arrears (Expenses & Income) 💵

a) Expense Arrears 💸

These are unpaid or due expenses at the end of the trading period.

Accounting treatment 🧾

• Add the unpaid amount to the expense in the profit and loss account. ➕
• Add the same amount to the current liabilities in the balance sheet. ➕

b) Income Arrears 💵

This is income not received at the end of the trading period.

Accounting treatment 🧾

• Add the amount not received to the income in the profit and loss account. ➕
• Add the same amount to the current assets in the balance sheet. ➕

3. Prepayments 💳

Prepayments are amounts paid in advance at the end of the trading period, either expenses or income.

4. Bad Debts and Provision for Bad Debts 🚫💵

Bad debts are irrecoverable debts, considered expenses to the business and debited in the profit and loss account.

Causes of Bad Debts: ⚠️

• Death of debtors ⚰️
• Debtors declared bankrupt 💔
• Debtor runs mad or runs away 🏃‍♂️💨

Accounting treatment 🧾

• Add bad debts to the list of expenses in the profit and loss account. ➕
• Subtract the same amount from debtors in the balance sheet. ➖

Types of Provision for Bad Debts:

• Creation of provision for bad debts 🆕
• Increase in provision for bad debts 📈
• Decrease in provision for bad debts 📉

a) Creation of Provision for Bad Debts 🆕

This is the first provision created by the organization, forming a base for either an increase or decrease. It may be a percentage of the debtors or a specific figure adjusted over time.

Accounting treatment 🧾

• Debit the profit and loss account with the provision amount (as an expense). ➖
• Credit the provision for bad debts account. ➕
• Deduct the current provision from debtors in the balance sheet. ➖

b) Increase in Provision for Bad Debts 📈

An increase occurs when the provision in the current year is larger than the previous year.

Accounting treatment 🧾

• Debit the profit and loss account with the increase (as an expense). ➖
• Credit the provision for bad debts account with the increase. ➕
• Deduct the current provision from debtors in the balance sheet. ➖

c) Decrease in Provision for Bad Debts 📉

A decrease occurs when the provision in the current year is smaller than the previous year.

Accounting treatment 🧾

• Add the decrease to the list of incomes in the profit and loss account. ➕
• Deduct the newly calculated provision from debtors in the balance sheet. ➖
• Debit the provision for bad debts account with the difference. ➖

5. Depreciation 📉

Depreciation refers to the wear and tear or loss of value of fixed assets over time.

Causes of Depreciation: ⚠️

• Usage of an asset ⚙️
• Obsolescence (passage of time) ⏳
• Weather conditions ☔
• Friction 🔧

Methods of Depreciation

• Straight Line Method (Fixed equal instalments) ➕
• Reducing Balance Method (Diminishing balance) 📉
• Revaluation 🔄

Straight Line Method/Equal Instalment

In this method, depreciation is calculated as a fixed percentage of the cost price of the asset or based on its scrap value.

Depreciation formula:

Depreciation = (Cost Price − Scrap Value) / Estimated number of years the asset will last

Reducing Balance Method/Diminishing Balance

Depreciation is calculated on the book value or scrap value of the asset. The accumulated depreciation increases over the years, called Accumulated Depreciation.

Accounting treatment 🧾

• Add the current year's depreciation to the list of expenses in the profit and loss account. ➕
• Subtract accumulated depreciation from the cost price of the asset in the balance sheet. ➖

6. Drawings in Kind Not Recorded in the Books of Accounts 🎨

These are goods taken by the owner of the business for personal use without being recorded in the books of accounts. The adjustment is made in the final accounts.

Accounting treatment 🧾

• In the trading account, subtract the amount of unrecorded drawings from the purchases figure. ➖
• In the balance sheet, add the amount to the recorded drawings or use it as the actual drawings figure if none was recorded. The total drawings is then deducted from capital. ➕

7. Arrears and Accruals 💰

Arrears are unpaid expenses or incomes at the end of the trading period. They may be referred to as amounts due, accruals, or outstanding payments.

a) Expense Arrears 💸

These are unpaid expenses at the end of the trading period.

Accounting treatment 🧾

• Add the unpaid amount (arrears) to the concerned expense in the profit and loss account. ➕
• Add the same amount to the current liabilities in the balance sheet. ➕

b) Income Arrears 💵

This is income that has not been received by the end of the trading period.

Accounting treatment 🧾

• Add the amount not received to the concerned income in the profit and loss account. ➕
• Add the same amount to the current assets in the balance sheet. ➕

8. Prepaid Expenses and Income 💳

Prepayments refer to amounts paid or received in advance at the end of the trading period, which may be either expenses or income.

a) Prepaid Expenses 💵

This refers to expenses that have been paid in advance, before they are incurred.

Accounting treatment 🧾

• Subtract prepaid expenses from the concerned expense in the profit and loss account. ➖
• Add the same amount to the current assets in the balance sheet. ➕

b) Prepaid Income 💵

This refers to income that has been received in advance for future periods, such as rent received before it is due.

Accounting treatment 🧾

• Subtract the prepaid income from the concerned income in the profit and loss account. ➖
• Add the same amount to the current liabilities in the balance sheet. ➕

9. Provision for Depreciation 📉

Depreciation is a non-cash expense that spreads the cost of a fixed asset over its useful life.

Types of Depreciation: ⚠️

• Straight line method ➕
• Reducing balance method 📉

Straight Line Method

This method applies a fixed percentage to the cost price of an asset each year.

Accounting treatment 🧾

• Add depreciation as an expense in the profit and loss account. ➕
• Deduct accumulated depreciation from the cost of the asset in the balance sheet. ➖

Reducing Balance Method

This method applies a fixed percentage to the book value (cost minus accumulated depreciation) of an asset each year.

Accounting treatment 🧾

• Add depreciation as an expense in the profit and loss account. ➕
• Deduct accumulated depreciation from the asset's book value in the balance sheet. ➖

10. Drawings 🎨

Drawings refer to goods or cash withdrawn by the owner of the business for personal use.

Accounting treatment 🧾

• In the trading account, subtract the amount of drawings from purchases. ➖
• In the balance sheet, subtract the total drawings from the owner's capital. ➖