Final Accounting is done after the end of the accounting period.

The trial balance that we consider in the preparation of final accounts is the one that is prepared after the end of the accounting period with balances as on the last day (or moment to be more specific) of the accounting period.

The balances that appear in the trial balance are generally the ones that would have been taken into account after having recorded all the transactions relating to the accounting period.

Some of the reasons for the presence of such transactions are

Transactions which do not occur in the normal course of business

Examples of such transactions

1. Stock taken away by the proprietor for personal use
2. Abnormal loss of stock

Transactions which have to be recorded only towards or after the end

Examples of such transactions

1. Depreciation on Assets
2. Outstanding Expenses
3. Prepaid Expenses
4. Outstanding Incomes
5. Pre-received Incomes

Transactions relating to Error Rectifications

If there are errors which are identified subsequent to the preparation of the Trial Balance, the rectification entries required to set right the errors, would amount to transactions which have not been journalised.

Note that though the agreement of trial balance is a prima facie proof of absence of errors in accounting, it is not a conclusive proof.

In problem solving, we find them in the form of explanatory sentences appended to the trial balance with the heading additional information, notes, adjustments etc.

Example

note

1. A Machine purchased on credit from M/s Ramsay Machine Tools on the last day of the accounting period for 2,00,000 is not yet brought into the books.
2. Wages to the extent of 43,000 are incorrectly recorded as Salaries.

These sentences have to analysed to identify the accounting transactions.

1. Purchased Machine for credit from M/s Ramsay Machine Tools for 2,00,000.
2. Rectification of incorrect recording of wages as salaries.

True, they are additional transactions and can be called so.

However, using the phrase additional transactions would give a wrong notion that they are normal and regular accounting transactions. What we call adjustments are generally transactions that are dealt with after the preparation of the trial balance, many of which occur only once towards the end of the accounting period.

Adjustments - appropriate term

In manual accounting, the trial balance is used of in the preparation of final accounts, so as to eliminate a lot of work in the form of recording transactions for making up final accounts, posting them into respective ledger accounts, re balancing the ledger accounts effected by these transactions.

Therefore even for the purpose of bringing the transactions identified as adjustments into books of accounts, a method has been designed which would eliminate the need for recording these transaction, posting them into the ledger and re balancing the ledger accounts affected.

The effect of these transactions is brought into account by mathematically adjusting the existing balances. It is for this reason they are called adjustments.

Example

• additional information

  Wages to the extent of 43,000 are incorrectly recorded as Salaries.
• Relevant balances in the Trial balance before adjustment

  Trial Balance of M/s Azaya Traders as on 30^th June 20_6

  Particulars	L/F	Amount (Dr)	Amount (Cr)
  – – Salaries Wages – –	– – – – –	– – 1,53,000 18,000 –

• The explanation indicates an error of principle whereby an expenditure that was to be debited in a particular account has been debited to another account. To rectify the error a journal entry transferring the erroneous debit from the Salaries a/c to the Wages a/c has to be passed.

  Journal

  Particulars		Amount (Dr)	Amount (Cr)
  Wages a/c To Salaries a/c	Dr	43,000	43,000

• Posting the above journal to the ledgers

  Salaries a/c

  DrCr
  Particulars	Amount	Particulars	Amount
  To Balance b/d	1,53,000	By Wages By Balance c/d	43,000 1,10,000
  	1,53,000		1,53,000
  To Balance b/d	1,10,000

  Wages a/c

  DrCr
  Particulars	Amount	Particulars	Amount
  To Balance b/d To Salaries a/c	18,000 43,000	By Balance c/d	61,000
  	61,000		61,000
  To Balance b/d	61,000

• Relevant ledger account balances in the redrawn trial balance after adjustment

  Trial Balance of M/s Azaya Traders as on 30^th June 20_6

  Particulars	L/F	Amount (Dr)	Amount (Cr)
  – – Salaries Wages – –	– – – – –	– – 1,10,000 61,000 –

The Method of Adjustment

• Salaries a/c

  It has got a debit balance.

  It has to be credited by an amount of 43,000 in the entry.

  It's balance decreases by 43,000.

  Salaries being indirect expenditure, Salaries a/c is closed by transfer to the Profit and Loss a/c. Thus the balance of salaries in the trial balance appears in the Profit and Loss a/c.

• Wages a/c

  It has got a debit balance.

  It has to be debited by an amount of 43,000 in the entry.

  It's balance increases by 43,000.

  Wages being direct expenditure, Wages a/c is closed by transfer to the Trading a/c. Thus the balance of wages in the trial balance appears in the Trading a/c.

The adjustment in the change in balances in the accounts is made at the time of preparation of Final accounts. The balance from the trial balance before making the adjustment is considered and the mathematical operation to be made to arrive at the balance after making the adjustment is shown where the amount appears in the Trading a/c or Profit and Loss a/c or the Balance Sheet as the case may be.

Effect of the Transaction or adjustment to be made

1. (−) 43,000 from Salaries shown on the debit side of P/L a/c
2. (+) 43,000 to Wages shown on the debit side of Trading a/c

To make adjustments one should have an idea of the journal entry related to the transaction relating to the adjustment. If we know the Journal entry, we can identify the effect of the same on the ledger accounts and thus be able to identify the adjustments to be made.

The adjustments are made at the time of making up the final accounts within the three parts that make up the final accounting, i.e. the "Trading a/c", "Profit & Loss a/c" and the "Balance Sheet".

A working note in this format would be useful

Symbols - + (Add), − (Deduct), ✔ (Show), × (Remove)

Till we get accustomed, reading (and writing) the note as follows would help

The following additional information is available

1. A Machine purchased on credit from M/s Ramsay Machine Tools for 2,00,000 is not yet recorded in the books.
2. Wages to the extent of 43,000 are incorrectly recorded as Salaries.

An analysis of the additional transactions would enable us to identify what is to be done to incorporate their effect in accounting.

1. A Machine purchased on credit from M/s Ramsay Machine Tools for 2,00,000 is not yet recorded in the books.

   Working notes for adjustments

   Net Entry	Adjustment	Side	Where
   Dr. Machinery a/c Cr. Ramsay Machine Tools a/c	1. (+) to Machinery 2. (−) to Ramsay Machine Tools	Assets Liabilities	B/S B/S

   Read as

   Adjustment read as
   1. Add to Machinery on the assets side of the Balance Sheet 2. Deduct from Ramsay Machine Tools on the liabilities side of Balance Sheet

   Accounting for Adjustment

   • Relevant balances in the Trial balance before adjustment

     Trial Balance of M/s Azaya Traders as on 30^th June 20_6

     Particulars	L/F	Amount (Dr)	Amount (Cr)
     – – Machinery – Ramsay Machine Tools –	– – – – –	– – 4,80,000 –	0

     Where an account that is not present in the books of accounts is to be taken into consideration, assume it to be present with a zero balance.

   • The transaction to be recorded would be - Machinery purchased for credit from M/s Ramsay Machine Tools for 2,00,000.

     Journal

     Particulars		Amount (Dr)	Amount (Cr)
     Machinery a/c To Ramsay Machine Tools a/c	Dr	2,00,000	2,00,000

   • Posting the above journal to the ledgers

     Machinery a/c

     DrCr
     Particulars	Amount	Particulars	Amount
     To Balance b/d To Ramsay Machine Tools a/c	4,80,000 2,00,000	By Balance c/d	6,80,000
     	6,80,000		6,80,000
     To Balance b/d	6,80,000

     Ramsay Machine Tools a/c

     DrCr
     Particulars	Amount	Particulars	Amount
     To Balance c/d	2,00,000	By Machinery c/d	2,00,000
     	2,00,000		2,00,000
     		By Balance b/d	2,00,000

   • Relevant ledger account balances in the redrawn trial balance after adjustment

     Trial Balance of M/s Azaya Traders as on 30^th June 20_6

     Particulars	L/F	Amount (Dr)	Amount (Cr)
     – – Machinery – Ramsay Machine Tools –	– – – – –	– – 6,80,000 –	2,00,000

2. Wages to the extent of 43,000 are incorrectly recorded as Salaries.

   Working notes for adjustments

   Net Entry	Adjustment	Side	Where
   Dr. Wages a/c Cr. Salaries a/c	1. (+) to Wages 2. (−) from Salaries	Debit Debit	Trdg P/L

   Accounting explanation Above

3. Invisible Adjustments

   There would be some transactions like transfer of net profits which are not specifically stated but have to be taken care of in final accounting.

   Transfer of net profit to capital

   Working notes for adjustments

   Entries	Net Entry	Adjustment	Side	Where
   Dr. P/L a/c Cr. Net Profit a/c Dr. Net Profit a/c Cr. Capital a/c	Dr. P/L a/c Cr. Capital a/c	1. (✔) as Net Profit 2. (+) to Capital	Debit Liabilities	P/L B/S

   Net Effect

   There may be instances where we have to record more than one journal entry to bring the effect of a transaction into the books. Even in such cases, for the purpose of final accounting adjustments what is needed is the net effect of all those entries.

   The objective is to adjust the final position to the one it would have been had all the entries been passed and the postings been made.

Where an item appears in the trial balance it is to be dealt with only once.

Adjustments are transactions relating to the business which are yet to be journalised. We call them adjustments for the reason that they are dealt with by making mathematical adjustments to the figures of ledger account balances instead of passing the regular journal entries.

Every transaction relating to business has its effect on two elements. In making mathematical adjustments we have to ensure that we are adjusting the two elements that are affected by the transaction.

Why at least?

Since there would be at least a journal entry that has to be passed, we say the adjustment has to be dealt with at least twice or at least at two places in final accounting.

• Outstanding and Prepaid Expenditures
• Managerial Commission Payable based on profits
• Pre-received and Receivable Incomes
• Closing Stock
• Stock/Goods taken by owner(s) for personal purposes
• Stock/Goods used in building/constructing an asset
• Stock/Goods used for Advertisement Purposes
• Abnormal Loss
• Normal Loss
• Interest on Capital
• Interest on Drawings
• Depreciation on Assets
• Debtors, Bad Debts, Discount Allowed, Provision for Bad Debts, Provision for Discount on Debtors
• Errors of Principle
  • Capital expense treated as revenue
• Errors of Comission
• Errors of Omission
  • Sales returns not recorded
  • Discounted Bill dishonoured