Final accounts with adjustments

Financial Accounting · Unit III · Topic 10 of 14 · 5 min read

Why adjustments are made, the double effect of each (closing stock, outstanding and prepaid expenses, accrued and advance income, depreciation, bad debts and provision for doubtful debts, interest on capital and drawings) with adjusting entries, the Rs. 2,69,030 trial balance (January 2026) fully solved, and the Rs. 1,37,000 problem answered.

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On this page

1. Meaning
2. The adjustments and their double effect
3. Worked problem: trial balance Rs. 2,69,030 (January 2026)
4. Practice: trial balance Rs. 1,37,000 (January 2026, 100-mark paper)
How this is examined

Cases checked to exist. Read the judgment before quoting a holding.

Every case cited here has been checked to exist — the citation resolves and names the right parties. The propositions attributed to each case have not been verified line by line against the judgment. Case names link through to the full judgment: read it before quoting a holding in an examination answer, and never carry a proposition from notes into court on trust.

The examinable core. Every trial-balance problem carries four or five adjustments, and “What do you mean by adjustments? Give the adjusting entries for interest on capital and interest on drawings” is a 6-mark question (January 2026). The rule that solves all of them: each adjustment is shown twice — once in the Trading or P&L Account and once in the Balance Sheet.

1. Meaning

The trial balance records what has been entered in the books. Some facts of the year are not yet entered: stock unsold at the year end, expenses due but unpaid, expenses paid for next year, the fall in value of assets, debts that will not be collected. Adjustments are the entries passed at the end of the year to bring these into the accounts, so that the profit is calculated on the accrual and matching basis and the balance sheet shows the true position.

2. The adjustments and their double effect

Adjustment	Adjusting entry	First effect	Second effect
Closing stock	Closing Stock A/c Dr, To Trading A/c	Credit of Trading A/c	Current asset
Outstanding expense	Expense A/c Dr, To Outstanding Expense A/c	Added to the expense	Current liability
Prepaid expense	Prepaid Expense A/c Dr, To Expense A/c	Deducted from the expense	Current asset
Accrued income	Accrued Income A/c Dr, To Income A/c	Added to the income	Current asset
Income received in advance	Income A/c Dr, To Income Received in Advance A/c	Deducted from the income	Current liability
Depreciation	Depreciation A/c Dr, To Asset A/c	Debit of P&L	Deducted from the asset
Further bad debts	Bad Debts A/c Dr, To Debtors A/c	Added to bad debts in P&L	Deducted from debtors
Provision for doubtful debts	P&L A/c Dr, To Provision for Doubtful Debts A/c	Debit of P&L	Deducted from debtors
Interest on capital	Interest on Capital A/c Dr, To Capital A/c	Debit of P&L	Added to capital
Interest on drawings	Drawings A/c Dr, To Interest on Drawings A/c	Credit of P&L	Deducted from capital

Interest on capital and drawings, in figures. Capital Rs. 1,00,000, interest 6% = Rs. 6,000: Interest on Capital A/c Dr 6,000 To Capital A/c 6,000; then P&L A/c Dr 6,000 To Interest on Capital A/c 6,000. Drawings Rs. 12,000 spread over the year, interest 5% for an average of six months = Rs. 300: Drawings A/c Dr 300 To Interest on Drawings A/c 300; then Interest on Drawings A/c Dr 300 To P&L A/c 300. Interest on capital is an expense to the business but income to the proprietor; interest on drawings is the reverse.

Provision for doubtful debts is calculated on debtors after deducting further bad debts. If an old provision appears in the trial balance, the P&L is charged with new bad debts + new provision − old provision.

3. Worked problem: trial balance Rs. 2,69,030 (January 2026)

Adjustments: closing stock Rs. 40,925; salaries unpaid Rs. 800; further bad debts Rs. 400; provision 5% on debtors; unexpired insurance Rs. 300. Provision = 5% of (30,000 − 400) = Rs. 1,480.

Trading and Profit and Loss Account for the year ended 31-3-2024

Dr	Rs.	Cr	Rs.
To Opening stock	40,000	By Sales 1,80,500 less returns 2,400	1,78,100
To Purchases 1,30,295 less returns 195	1,30,100	By Closing stock	40,925
To Wages	22,525
To Octroi	500
To Gross profit c/d	25,900
	2,19,025		2,19,025
To Salaries 8,000 + 800	8,800	By Gross profit b/d	25,900
To Repairs	1,675	By Discount received	530
To Bad debts 2,310 + 400	2,710
To Provision for doubtful debts	1,480
To Discount allowed	800
To Interest on loan	600
To Sales tax	800
To Insurance 1,000 − 300	700
To Charity	125
To Rent	2,000
To Net profit to capital	6,740
	26,430		26,430

Balance Sheet as on 31-3-2024

Liabilities	Rs.	Assets	Rs.
Capital 37,500 + NP 6,740	44,240	Machinery	16,000
12% Loan	20,000	Closing stock	40,925
Creditors	30,305	Debtors 30,000 − 400 − 1,480	28,120
Outstanding salaries	800	Prepaid insurance	300
		Cash at bank	9,500
		Cash in hand	500
	95,345		95,345

Points in this problem. Returns 2,400 (debit) are sales returns and 195 (credit) purchases returns; discounts 800 (debit) are allowed and 530 (credit) received. Octroi is a duty on goods brought in, so it is a direct expense. Interest on the 12% loan for a full year would be Rs. 2,400 against Rs. 600 paid; the question gives no date for the loan and no adjustment, so none is made — but a line saying “assumed the loan was taken during the year” shows the examiner you noticed.

4. Practice: trial balance Rs. 1,37,000 (January 2026, 100-mark paper)

Adjustments: closing stock 20,000; insurance prepaid 200; provision 5% on debtors (600); depreciation on furniture 10% (1,500). Answer: Trading — opening stock 13,000 + net purchases 37,000 + wages 4,000 against net sales 68,000 + closing stock 20,000; gross profit Rs. 34,000 (sides 88,000). P&L — salary 8,000, general expenses 3,000, insurance 800, provision 600, depreciation 1,500 = 13,900; net profit Rs. 20,100. Balance sheet total Rs. 69,100: capital 50,000 + 20,100 − 15,000 = 55,100, creditors 10,000, bills payable 4,000; against furniture 13,500, debtors 11,400, bills receivable 5,000, stock 20,000, prepaid insurance 200, cash and bank 19,000.

How this is examined

Both Unit III problems in January 2026 and both in June 2025 (A and Co., and the motor-truck trial balance) turn on the same five or six adjustments. Write each one inside the account (“To Salaries 8,000 + 800”), show the deduction from debtors on the face of the balance sheet, and check that the sides agree before moving on. The 6-mark theory question is answered by section 1, the table in section 2 and the interest example.

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