Financial Statements - II (Class 11 Accountancy)

• Need for Adjustments

  • Matching Principle: Accrual basis of accounting
  • True and Fair View: Ascertaining correct net profit and financial position
  • Unrecorded transactions at the end of the accounting period

• Key Adjustments & Treatment

  • Closing Stock
    • Valuation at cost price or net realizable value, whichever is less
    • Treatment: Credit Trading A/C, Asset in Balance Sheet
  • Outstanding Expenses
    • Expenses relating to current year but unpaid
    • Treatment: Add to respective expense, Liability in Balance Sheet
  • Prepaid Expenses
    • Expenses paid in advance for next year
    • Treatment: Deduct from respective expense, Asset in Balance Sheet
  • Accrued Income
    • Income earned but not yet received
    • Treatment: Add to respective income, Asset in Balance Sheet
  • Income Received in Advance
    • Income received for future periods
    • Treatment: Deduct from respective income, Liability in Balance Sheet
  • Depreciation
    • Fall in value of assets due to use or obsolescence
    • Treatment: Debit P&L A/C, Deduct from asset in Balance Sheet
  • Bad Debts
    • Amounts irrecoverable from debtors
    • Treatment: Debit P&L A/C, Deduct from Sundry Debtors
  • Provision for Bad and Doubtful Debts
    • Estimated loss on debtors
    • Treatment: Debit P&L A/C, Deduct from Sundry Debtors
  • Provision for Discount on Debtors
    • Encouraging prompt payment
    • Treatment: Debit P&L A/C, Deduct from Sundry Debtors (after bad debts and doubtful debts)
  • Manager's Commission
    • Calculated as a percentage of net profit
    • Before charging such commission: $\frac{\text{Net Profit} \times \text{Rate}}{100}$
    • After charging such commission: $\frac{\text{Net Profit} \times \text{Rate}}{100 + \text{Rate}}$

• Preparation of Final Financial Statements

  • Trading Account
    • Calculates Gross Profit or Gross Loss
    • Direct expenses and direct revenues
  • Profit and Loss Account
    • Calculates Net Profit or Net Loss
    • Indirect expenses and indirect incomes
  • Balance Sheet
    • Statement of Assets, Liabilities, and Capital
    • Based on Accounting Equation: $\text{Assets} = \text{Liabilities} + \text{Capital}$
    • Marshalling of Assets and Liabilities (Liquidity vs. Permanence order)