Adjustments 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 prereceived/receivable incomes are dealt with here.
Incomes Receivable
At the end of the accounting period, there may be incomes which have become due but have not yet been received. If the organistion is following the mercantile system of accounting, these incomes are to be brought into account.
-
Credit » Income a/c
"Income a/c" is a nominal account with a credit balance. The balance in the "Income a/c" generally indicates the total amount received on account of the income during the current accounting period.
To bring the income that has not yet been brought into account into the books, the relevant income account has to be credited.
[Income a/c – Nominal a/c – Credit all Incomes and Gains.]
Debit » Income Receivable a/c
The income receivable is indicative of an amount that is owed to the organisation by a person or organisation. The persons who owe to the organisation are its debtors.
Thus amount of income receivable is debited to the "Income Receivable a/c".
[Income Receivable a/c – Personal a/c – Debit the benefit receiver.]
|
Journal in the books of M/s ____ for the period from 1st April 2005 to 31st March 2006
|
| Date |
V/R
No. |
Particulars |
L/F |
Debit Amount
(in Rs) |
Credit Amount
(in Rs) |
| 1st to 30th |
– |
Income Receivable a/c
To Income a/c
|
Dr |
–
– |
xxx |
xxx |
|
[For the amount income relating to the current period, not yet received brought into the books.]
|
Adjustment
The amount of income receivable is to be
- Added to the relevant income on the credit side of the "Trading a/" or "Profit & Loss a/c".
- Shown as an asset on the assets side of the balance sheet.
Explanation/Illustration » Hide/Show
|
|
Trial Balance of M/s ___ as on 1st April 2005
|
| Particulars |
L/F |
Debit Amount
(in Rs) |
Credit Amount
(in Rs) |
Income a/c
Income Receivable a/c
|
–
–
|
6,800
|
|
| Total |
|
|
|
The "Income a/c" being a nominal account is created anew in every accounting period. Thus it has no balance on the opening day of the accounting period.
- Cash received towards the income
» Rs. 1,02,000 (includes past dues Rs. 5,200)
- Income is to be received @ Rs. 9,000/month
Income Receivable relating to the current period = Rs. 11,200 {(Rs. 9,000 × 12) − (Rs. 1,02,000 − 5,200)}
Method I :: "Income Receivable a/c" exists all throughout
"Income Receivable a/c" is treated as a separate asset and the amount received towards the past dues are recorded through this account.
|
Journal in the books of M/s ____ for the period from 1st July 2005 to 30th June 2005
|
| Date |
V/R
No. |
Particulars |
L/F |
Debit Amount
(in Rs) |
Credit Amount
(in Rs) |
| 1st to 31st |
– |
Cash/Bank a/c
To Income a/c
To Income Receivable a/c
|
Dr |
–
–
– |
1,02,000 |
96,800
5,200 |
|
[For the amount received towards the income relating to the current period as well as the past period dues.]
|
| Date |
Particulars |
J/F |
Amount
(in Rs) |
Date |
Particulars |
J/F |
Amount
(in Rs) |
|
31/03/06
|
To Bal c/d
|
–
|
96,800
|
1st-31st
|
By Cash/Bank a/c
|
–
|
96,800
|
| |
|
|
96,800 |
|
|
|
96,800 |
| |
|
|
|
31/03/06 |
By Bal b/d |
– |
96,800 |
| Dr | Income Receivable a/c | Cr |
| Date |
Particulars |
J/F |
Amount
(in Rs) |
Date |
Particulars |
J/F |
Amount
(in Rs) |
01/04/05
|
To Bal b/d
|
–
|
6,800
|
1st-31st
31/03/06
|
By Cash/Bank a/c
By Bal c/d
|
–
–
|
5,200
1,600
|
| |
|
|
6,800 |
|
|
|
6,800 |
| 01/04/06 |
To bal b/d |
– |
1,600 |
|
|
|
|
|
Trial Balance of M/s ___ as on 31st March 2006
|
| Particulars |
L/F |
Debit Amount
(in Rs) |
Credit Amount
(in Rs) |
Income a/c
Income Receivable a/c
|
–
–
|
1,600
|
96,800
|
| Total |
|
|
|
|
Journal in the books of M/s ____ for the period from 1st April 2005 to 31st March 2006
|
| Date |
V/R
No. |
Particulars |
L/F |
Debit Amount
(in Rs) |
Credit Amount
(in Rs) |
| 30/06/06 |
– |
Income Receivable a/c
To Income a/c
|
Dr |
–
– |
11,200 |
11,200 |
|
[For the amount of income relating to the current period, not yet received, brought into the books.]
|
| Date |
Particulars |
J/F |
Amount
(in Rs) |
Date |
Particulars |
J/F |
Amount
(in Rs) |
|
31/03/06
|
To P/L a/c
|
–
|
1,08,000
|
31/03/06
31/03/06
|
By Bal b/d
By Inc. Rec a/c
|
–
–
|
96,800
11,200
|
| |
|
|
1,08,000 |
|
|
|
1,08,000 |
| |
|
|
|
|
|
|
|
| Dr | Income Receivable a/c | Cr |
| Date |
Particulars |
J/F |
Amount
(in Rs) |
Date |
Particulars |
J/F |
Amount
(in Rs) |
31/03/06
31/03/06
|
To Bal b/d
To Income a/c
|
–
–
|
1,600
11,200
|
31/03/06
|
By Bal c/d
|
–
|
12,800
|
| |
|
|
12,800 |
|
|
|
12,800 |
| 01/04/06 |
To bal b/d |
– |
12,800 |
|
|
|
|
| Dr | Trading and Profit & Loss a/c | Cr |
| Particulars |
Amount
(in Rs) |
Amount
(in Rs) |
Particulars |
Amount
(in Rs) |
Amount
(in Rs) |
|
|
|
Income a/c
|
|
1,08,000
|
| |
|
|
|
|
|
| Balance Sheet of M/s ______ as on 30th June 2006 |
| Liabilities |
Amount |
Amount |
Assets |
Amount |
Amount |
|
|
|
Income Receivable
|
|
12,800
|
| |
|
|
|
|
|
Method II :: "Income Receivable a/c" is raised and written off
The "Income Receivable a/c" is created at the end of the accounting period and is written off by transfer to the "Income a/c" at the beginning of the accounting period.
|
Trial Balance of M/s ___ as on 1st April 2005
|
| Particulars |
L/F |
Debit Amount
(in Rs) |
Credit Amount
(in Rs) |
Income a/c
Income Receivable a/c
|
–
–
|
6,800
|
–
|
| Total |
|
|
|
The balance in the "Income Receivable a/c" at the beginning of the accounting period represents the income receivable at the end of the previous period brought forward. The balance in the "Income Receivable a/c" at the beginning of the accounting period is transfered to the "Income a/c".
| Dr | Income Receivable a/c | Cr |
| Date |
Particulars |
J/F |
Amount
(in Rs) |
Date |
Particulars |
J/F |
Amount
(in Rs) |
|
01/04/05
|
To Bal b/d
|
–
|
6,800
|
01/04/05
|
By Income a/c
|
–
|
6,800
|
| |
|
|
6,800 |
|
|
|
6,800 |
| |
|
|
|
|
|
|
|
The amount that is received during the current period, whether towards the current period dues or the previous period dues is recorded through the "Income a/c", as that is the only account that is available.
|
Journal in the books of M/s ____ for the period from 1st Arpil 2005 to 31st March 2006
|
| Date |
V/R
No. |
Particulars |
L/F |
Debit Amount
(in Rs) |
Credit Amount
(in Rs) |
| 1st to 30th |
– |
Cash/Bank a/c
To Income a/c
|
Dr
Dr |
–
– |
1,02,000 |
1,02,000 |
|
[For the amount received towards the income relating to the current period as well as the previous period dues.]
|
| Date |
Particulars |
J/F |
Amount
(in Rs) |
Date |
Particulars |
J/F |
Amount
(in Rs) |
01/04/05
31/03/06
|
To Inc. Rec. a/c
To Bal c/d
|
–
–
|
6,800
95,200
|
1st-31st
|
By Cash/Bank a/c
|
–
|
1,02,000
|
| |
|
|
1,02,000 |
|
|
|
1,02,000 |
| |
|
|
|
31/03/06 |
By bal b/d |
– |
95,200 |
|
Trial Balance of M/s ___ as on 31st March 2006
|
| Particulars |
L/F |
Debit Amount
(in Rs) |
Credit Amount
(in Rs) |
Income a/c
Income Receivable a/c
|
–
–
|
–
|
95,200
–
|
| Total |
|
|
|
The "Income Receivable a/c" does not carry any balance till the receivables is recorded at the end of the accounting period.
|
Journal in the books of M/s ____ for the period from 1st April 2005 to 31st March 2006
|
| Date |
V/R
No. |
Particulars |
L/F |
Debit Amount
(in Rs) |
Credit Amount
(in Rs) |
| 30/06/06 |
– |
Income Receivable a/c
To Income a/c
|
Dr |
–
– |
12,800 |
12,800 |
|
[For the total amount of income receivable at the end of the accounting period brought into books.]
|
Note
The total amount of income receivable at the end of the accounting period has to be brought into books through the above entry and not just the income receivable relating to the current period.
| Date |
Particulars |
J/F |
Amount
(in Rs) |
Date |
Particulars |
J/F |
Amount
(in Rs) |
|
31/03/06
|
To P/L a/c
|
–
|
1,08,000
|
31/03/06
|
By Bal b/d
By Inc. Rec. a/c
|
–
–
|
95,200
12,800
|
| |
|
|
1,08,000 |
|
|
|
1,08,000 |
| |
|
|
|
|
|
|
|
| Dr | Income Receivable a/c | Cr |
| Date |
Particulars |
J/F |
Amount
(in Rs) |
Date |
Particulars |
J/F |
Amount
(in Rs) |
|
31/03/06
|
To Income a/c
|
–
|
12,800
|
31/03/06
|
By Bal c/d
|
–
|
12,800
|
| |
|
|
12,800 |
|
|
|
12,800 |
| 31/03/06 |
To Bal b/d |
– |
12,800 |
|
|
|
|
| Dr | Trading and Profit & Loss a/c | Cr |
| Particulars |
Amount
(in Rs) |
Amount
(in Rs) |
Particulars |
Amount
(in Rs) |
Amount
(in Rs) |
|
|
|
Income
|
|
1,08,000
|
| |
|
|
|
|
|
| Balance Sheet of M/s ______ as on 30th June 2006 |
| Liabilities |
Amount |
Amount |
Assets |
Amount |
Amount |
|
|
|
Income Receivable
|
|
12,800
|
| |
|
|
|
|
|
Method II (alternative): Using Only "Income a/c"
The income receivable is shown as a balance in tte "Income a/c" itself. Thus the "Income a/c" is treated a personal account for the purpose of making up the balance sheet at the end of the accounting period and during all other times it is treated as a nominal account.
|
Trial Balance of M/s ___ as on 1st April 2005
|
| Particulars |
L/F |
Debit Amount
(in Rs) |
Credit Amount
(in Rs) |
Income a/c
|
–
|
|
6,800
|
| Total |
|
|
|
The "Income a/c" is a personal account for the purpose of preparation of the opening balance sheet and is treated a nominal account.
Thus, the balance shown in the account on the opening day is indicative of an income receivable relating ot the previous periods.
| Date |
Particulars |
J/F |
Amount
(in Rs) |
Date |
Particulars |
J/F |
Amount
(in Rs) |
31/03/06
|
To Bal b/d
To P/L a/c
|
–
–
|
6,800
1,08,000
|
1st-31st
31/03/06
|
By Cash/Bank a/c
By Bal c/d
|
–
–
|
1,02,000
12,800
|
| |
|
|
1,14,800 |
|
|
|
1,14,800 |
| 01/04/06 |
To bal b/d |
– |
12,800 |
|
|
|
|
The closing balance in the "Income a/c" indicates the total income receivable at the end of the accounting period. Even in this case, the total amount received during the current period is to be treated as being received for the income (without seggregating between receipt for the current period and receipt for the previous period dues)
The postings in the "Trading a/c" or "Profit and Loss a/c" would be the same as above with the only difference being in the name of the account head that is shown in the balance sheet. "Income a/c" would appear in the balance sheet instead of the "Income Receivable a/c".
Adjustment during Final Accounting
Adjustment is bringing in the effect of the transactions through mathematical operations of addition and subtraction. The adjustments to be made can be found out by ascertained the net effect of the journal entries to be recorded.
Adjustments are generally required for transactions which are not yet recorded at the time of making up the final accounts i.e. towards the end of the accounting period.
For the income receivable to be recorded at the end of the accounting period.
| Regular Entries |
Net Effect |
1) Income Receivable a/c Dr
To Income a/c
2) Income a/c Dr
To Trading a/c (Or) Profit & Loss a/c a/c
|
Income Receivable a/c Dr
To Trading a/c (Or) Profit & Loss a/c
|
The net effect would give an understanding on where the amounts are to be adjusted.
The amount of income receivable at the end of the accounting period is to be
- Added to the relevant income on the credit side of the "Trading a/" or "Profit & Loss a/c".
- Shown as an asset on the assets side of the balance sheet.
Method I
| Dr | Trading and Profit & Loss a/c | Cr |
| Particulars |
Amount
(in Rs) |
Amount
(in Rs) |
Particulars |
Amount
(in Rs) |
Amount
(in Rs) |
|
|
|
Income
(+) Cur. Per. Out.
Total Inc
|
96,800
11,200
|
1,08,000
|
| |
|
|
|
|
|
| Balance Sheet of M/s ______ as on 30th June 2006 |
| Liabilities |
Amount |
Amount |
Assets |
Amount |
Amount |
|
|
|
|
Inc Out.
(+) Curr. Per. due
Total Inc. Out.
|
1,600
11,200
|
12,800
|
| |
|
|
|
|
|
Method II
| Dr | Trading and Profit & Loss a/c | Cr |
| Particulars |
Amount
(in Rs) |
Amount
(in Rs) |
Particulars |
Amount
(in Rs) |
Amount
(in Rs) |
|
|
|
Income
(+) Total Out.
Total Inc
|
95,200
12,800
|
1,08,000
|
| |
|
|
|
|
|
| Balance Sheet of M/s ______ as on 31st March 2006 |
| Liabilities |
Amount |
Amount |
Assets |
Amount |
Amount |
|
|
|
|
Inc. Outstanding
|
|
12,800
|
| |
|
|
|
|
|
|
Income Prereceived
At the end of the accounting period, there may be incomes which have been received in advance. These are incomes which are received in advance and would have to be adjusted in the relevant income during the subsequent accounting periods.
Advances received are treated in a different manner from incomes prereceived, the difference being that the advances are repayable whereas incomes prereceived are liquidated by adjusting them in the amounts to be received in the future towards the income.
-
Debit » Income a/c
"Income a/c" is a nominal account with a credit balance. The balance in the "Income a/c" generally indicates the total amount received on account of the income during the current accounting period.
On the assumption that the receipts towards the income include the income prereceived, the income has to be adjusted (reduced) to ascertain the actual income that can be considered for the current period.
"Income a/c" shows a credit balance and as such to reduce it, the "Income a/c" has to be debited.
[Income a/c – Nominal a/c – Debit the benefit receiver.]
Credit » Income Prereceived a/c
The income prereceived is indicative of an amount that is owed by the organisation to another person or organisation. The persons to whom the organisation owes are its creditors.
Thus amount of income prerecieved is credited to the "Income Prereceived a/c".
[Income Prereceived a/c – Personal a/c – Credit the benefit giver.]
|
Journal in the books of M/s ____ for the period from 1st April 2005 to 31st March 2006
|
| Date |
V/R
No. |
Particulars |
L/F |
Debit Amount
(in Rs) |
Credit Amount
(in Rs) |
| 1st to 31st |
– |
Income a/c
To Income Prereceived a/c
|
Dr |
–
– |
xxx |
xxx |
|
[For the amount income relating to the subsequent periods received in advance being adjusted from the current period income.]
|
Adjustment
The amount of income prereceived is to be
- Deducted from the relevant income on the credit side of the "Trading a/" or "Profit & Loss a/c".
- Shown as a liability on the liabilities side of the balance sheet.
Explanation/Illustration » Hide/Show
|
|
Trial Balance of M/s ___ as on 1st April 2005
|
| Particulars |
L/F |
Debit Amount
(in Rs) |
Credit Amount
(in Rs) |
Income a/c
Income Prereceived a/c
|
–
–
|
4,300
|
|
| Total |
|
|
|
The "Income a/c" being a nominal account is created anew in every accounting period. Thus it has no balance on the opening day of the accounting period.
- Cash received towards the income
» Rs. 58,000 (includes Rs. 2,800 pre received)
Method I :: "Income Prereceived a/c" exists all throughout
This method of treating prereceived incomes is not possible since the prereceived income is not paid out in cash and is adjusted to the relevant income only.
Method II :: "Income Prereceived a/c" is raised and written off
The "Income Prereceived a/c" is created at the end of the accounting period and is written off by transfer to the "Income a/c" at the beginning of the accounting period.
|
Trial Balance of M/s ___ as on 1st April 2005
|
| Particulars |
L/F |
Debit Amount
(in Rs) |
Credit Amount
(in Rs) |
Income a/c
Income Prereceived a/c
|
–
–
|
|
4,300
|
| Total |
|
|
|
The balance in the "Income Prereceived a/c" at the beginning of the accounting period represents the prereceived income at the end of the previous period brought forward. This balance is transfered to the "Income a/c" at the beginning of the accounting period.
| Dr | Income Prereceived a/c | Cr |
| Date |
Particulars |
J/F |
Amount
(in Rs) |
Date |
Particulars |
J/F |
Amount
(in Rs) |
|
01/04/05
|
To Income a/c
|
–
|
4,300
|
01/04/05
|
By Bal b/d
|
–
|
4,300
|
| |
|
|
4,300 |
|
|
|
4,300 |
| |
|
|
|
|
|
|
|
The amount that is received during the current period, whether towards the current period dues or for the subsequent period is recorded through the "Income a/c".
|
Journal in the books of M/s ____ for the period from 1st April 2005 to 31st March 2006
|
| Date |
V/R
No. |
Particulars |
L/F |
Debit Amount
(in Rs) |
Credit Amount
(in Rs) |
| 1st to 31st |
– |
Cash'/Bank a/c
To Income a/c
|
Dr |
–
– |
58,000 |
58,000 |
|
[For the amount received towards the income relating to the current period as well as the income prereceived.]
|
| Date |
Particulars |
J/F |
Amount
(in Rs) |
Date |
Particulars |
J/F |
Amount
(in Rs) |
|
31/03/05
|
To Bal c/d
|
–
|
62,300
|
01/04/05
1st-31st
|
By Inc. Pre. a/c
By Cash/Bank a/c
|
–
–
|
4,300
58,000
|
| |
|
|
62,300 |
|
|
|
62,300 |
| |
|
|
|
31/03/06 |
By bal b/d |
– |
62,300 |
|
Trial Balance of M/s ___ as on 31st March 2006
|
| Particulars |
L/F |
Debit Amount
(in Rs) |
Credit Amount
(in Rs) |
Income a/c
Income Prereceived a/c
|
–
–
|
–
|
62,300
|
| Total |
|
|
|
The "Income Prereceived a/c" does not carry any balance till the entry for recording the total income prereceived is recorded at the end of the accounting period.
|
Journal in the books of M/s ____ for the period from 1st April 2005 to 31st March 2006
|
| Date |
V/R
No. |
Particulars |
L/F |
Debit Amount
(in Rs) |
Credit Amount
(in Rs) |
| 31/03/06 |
– |
Income a/c
To Income Prereceived a/c
|
Dr |
–
– |
2,800 |
2,800 |
|
[For the amount expenditure prepaid at the end of the accounting period.]
|
| Date |
Particulars |
J/F |
Amount
(in Rs) |
Date |
Particulars |
J/F |
Amount
(in Rs) |
31/03/06
31/03/06
|
To Inc. Pre recd. a/c
To P/L a/c
|
–
|
2,800
59,500
|
31/03/06
|
By Bal b/d
|
–
–
|
62,300
|
| |
|
|
62,300 |
|
|
|
62,300 |
| |
|
|
|
|
|
|
|
| Dr | Income Pre Received a/c | Cr |
| Date |
Particulars |
J/F |
Amount
(in Rs) |
Date |
Particulars |
J/F |
Amount
(in Rs) |
|
31/12/05
|
To Bal c/d
|
–
|
2,800
|
31/12/05
|
By Income a/c
|
–
|
2,800
|
| |
|
|
2,800 |
|
|
|
2,800 |
| |
|
|
|
31/03/06 |
By Bal b/d |
– |
2,800 |
| Dr | Trading and Profit & Loss a/c | Cr |
| Particulars |
Amount
(in Rs) |
Amount
(in Rs) |
Particulars |
Amount
(in Rs) |
Amount
(in Rs) |
|
|
|
Income
|
|
59,500
|
| |
|
|
|
|
|
| Balance Sheet of M/s ______ as on 31st Dec 2005 |
| Liabilities |
Amount |
Amount |
Assets |
Amount |
Amount |
Income Pre received
|
|
2,800
|
|
|
|
| |
|
|
|
|
|
Method II (alternative): Using Only "Income a/c"
The prereceived income is shown as a balance in the "Income a/c" itself, thereby treating the "Income a/c" as a personal account for the purpose of making up the balance sheet. The "Income a/c" appearing in the Balance Sheet is a personal account and for all other purposes it is a nominal account.
|
Trial Balance of M/s ___ as on 1st April 2005
|
| Particulars |
L/F |
Debit Amount
(in Rs) |
Credit Amount
(in Rs) |
Income a/c
|
–
|
|
4,300
|
| Total |
|
|
|
The "Income a/c" is a personal account for the purpose of preparation of the opening balance sheet and is treated a nominal account all througout the accounting period.
Thus, the credit balance shown in the account on the opening day is indicative of a prereceived income at the end of the previous period.
| Date |
Particulars |
J/F |
Amount
(in Rs) |
Date |
Particulars |
J/F |
Amount
(in Rs) |
31/03/06
|
To P/L a/c
To Bal c/d
|
–
–
|
59,500
2,800
|
01/04/05
1st-31st
|
By Bal b/d
By Cash/Bank a/c
|
–
–
|
4,300
58,000
|
| |
|
|
62,300 |
|
|
|
62,300 |
| |
|
|
|
01/04/06 |
By bal b/d |
– |
2,800 |
The closing debit balance in the "Income a/c" indicates the total income prereceived at the end of the accounting period. Even in this case, the total amount received during the current period is to be treated as having been received for the income (without seggregating between receipt for the current period and receipt for the subsequent periods.)
The postings in the "Trading a/c" or "Profit and Loss a/c" would be the same as above with the only difference being in the name of the account head that is shown in the balance sheet. "Income a/c" would appear in the balance sheet instead of the "Income Prereceived a/c".
Adjustment during Final Accounting
Adjustment is bringing in the effect of the transactions through mathematical operations of addition and subtraction. The adjustments to be made can be found out by ascertained the net effect of the journal entries to be recorded.
Adjustments are generally required for transactions which are not yet recorded at the time of making up the final accounts i.e. towards the end of the accounting period.
For the prereceived income to be recorded at the end of the accounting period.
| Regular Entries |
Net Effect |
1) Income a/c Dr
To Income Prereceived a/c
2) Trading a/c (Or) Profit & Loss a/c Dr
To Income a/c
|
Trading a/c (Or) Profit & Loss a/c Dr
To Income Prereceived a/c
|
The net effect would give an understanding on where the amounts are to be adjusted.
The amount of income prereceived at the end of the accounting period is to be
- deducted from the relevant income on the credit side of the "Trading a/" or "Profit & Loss a/c".
- Shown as a liability on the liabilities side of the balance sheet.
| Dr | Trading and Profit & Loss a/c | Cr |
| Particulars |
Amount
(in Rs) |
Amount
(in Rs) |
Particulars |
Amount
(in Rs) |
Amount
(in Rs) |
|
|
|
Income
(−) Pre Recd (cl).
Total Income
|
62,300
2,800
|
59,500
|
| |
|
|
|
|
|
| Balance Sheet of M/s ______ as on 31st March 2006 |
| Liabilities |
Amount |
Amount |
Assets |
Amount |
Amount |
Income Prereceived
|
|
2,800
|
|
|
|
| |
|
|
|
|
|
|
|
