📝 Chapter Notes & Revision

Financial Statements - II

🏫 MP BoardClass 11Accountancy

📐 Formula & Cheat Sheet (English)

Quick Revision Notes: Class 11 Accountancy

Chapter: Financial Statements - II (Adjustment Entries)

1. Introduction

While preparing Financial Statements (Trading and Profit & Loss Account, and Balance Sheet), all business transactions must be recorded on an Accrual Basis. To ensure that the financial statements reflect the true and fair view of the business, certain adjustments are required at the end of the accounting period for unrecorded transactions, expenses, and incomes.

2. Meaning of Adjustments

Adjustments refer to the entries passed at the end of the accounting year to bring unrecorded items, prepaid/outstanding expenses, accrued/unearned incomes, and provisions into the books of accounts so that matching principle (Revenue - Cost) is strictly followed.

3. Key Adjustments and Their Accounting Treatment

Every adjustment has a dual effect (Two-fold effect) and is shown in at least two places:

  1. Trading and P&L Account (Nominal nature)
  2. Balance Sheet (Real/Personal nature)

I. Closing Stock (अंतिम स्टॉक)

  • Meaning: Value of goods lying unsold at the end of the accounting period.
  • If given inside the Trial Balance: Shown only in the Balance Sheet (Asset Side).
  • If given outside the Trial Balance:
    1. Credited to Trading Account.
    2. Shown on the Asset side of the Balance Sheet.
  • Formula / Valuation: Valued at Cost Price or Net Realizable Value (Market Value), whichever is less (as per Accounting Standard 2 - Valuation of Inventories).

II. Outstanding Expenses (अदत्त व्यय)

  • Meaning: Expenses that relate to the current accounting period but remain unpaid at the end of the year.
  • Accounting Treatment:
    1. Add to the respective expense in the Trading or P&L Account (Debit side).
    2. Show as a Liability in the Balance Sheet.

III. Prepaid / Unexpired Expenses (पूर्वतदत व्यय)

  • Meaning: Expenses paid in advance for the next accounting period.
  • Accounting Treatment:
    1. Deduct from the respective expense in the Trading or P&L Account (Debit side).
    2. Show as an Asset in the Balance Sheet.

IV. Accrued Income / Income Outstanding (उपार्जित आय)

  • Meaning: Income earned during the current year but not yet received.
  • Accounting Treatment:
    1. Add to the respective income in the P&L Account (Credit side).
    2. Show as an Asset in the Balance Sheet.

V. Income Received in Advance / Unearned Income (अग्रिम प्राप्त आय)

  • Meaning: Income received in the current year, but which belongs to the next accounting period.
  • Accounting Treatment:
    1. Deduct from the respective income in the P&L Account (Credit side).
    2. Show as a Liability in the Balance Sheet.

VI. Depreciation (मूल्यह्रास / घिसावट)

  • Meaning: Permanent and gradual decrease in the book value of fixed assets due to usage, wear and tear, or obsolescence.
  • Accounting Treatment:
    1. Debit to P&L Account.
    2. Deduct from the specific Fixed Asset on the Asset side of the Balance Sheet.
  • Formula: $$\text{Depreciation} = \frac{\text{Cost of Asset} - \text{Estimated Scrap Value}}{\text{Estimated Useful Life}}$$ $$\text{Depreciation Amount} = \text{Book Value of Asset} \times \frac{\text{Rate of Depreciation}}{100}$$

VII. Bad Debts (अशोध ऋण / डूब चुके ऋण)

  • Meaning: Amount that has become irrecoverable from debtors.
  • Accounting Treatment:
    1. Debit to P&L Account.
    2. Deduct from Sundry Debtors on the Asset side of the Balance Sheet.

VIII. Provision for Doubtful Debts (संदिग्ध ऋणों के लिए प्रावधान)

  • Meaning: Estimated amount kept aside for potential bad debts from current debtors.
  • Accounting Treatment:
    1. Debit to P&L Account (or added to existing Bad Debts).
    2. Deduct from Sundry Debtors (after deducting further bad debts) in the Balance Sheet.
  • Formula for P&L Account: $$\text{Total Bad Debts (Trial Balance)} + \text{Additional/New Bad Debts} + \text{New Provision} - \text{Old Provision (Trial Balance)}$$

IX. Provision for Discount on Debtors (देनदारों पर बट्टे के लिए प्रावधान)

  • Meaning: Provision made for prompt payment discounts expected to be allowed to debtors.
  • Note: Calculated after deducting further bad debts and new provision for doubtful debts from Sundry Debtors.
  • Accounting Treatment:
    1. Debit to P&L Account.
    2. Deduct from Sundry Debtors in the Balance Sheet.

X. Provision for Discount on Creditors (लेनदारों पर बट्टे के लिए प्रावधान)

  • Meaning: Expected discount to be received from creditors for early payment.
  • Accounting Treatment:
    1. Credit to P&L Account.
    2. Deduct from Sundry Creditors in the Balance Sheet.

XI. Manager’s Commission (प्रबंधक का कमीशन)

  • Meaning: Commission payable to the manager based on net profit.
  • Case A: Before Charging such Commission: $$\text{Commission} = \text{Net Profit (before commission)} \times \frac{\text{Rate}}{100}$$
  • Case B: After Charging such Commission: $$\text{Commission} = \text{Net Profit (before commission)} \times \frac{\text{Rate}}{100 + \text{Rate}}$$
  • Accounting Treatment:
    1. Debit to P&L Account.
    2. Show as Outstanding Commission (Liability) in the Balance Sheet.

4. Summary Table of Adjustments

Adjustment ItemTrading / P&L Account EffectBalance Sheet Effect
Closing StockCredit side (Trading)Asset Side
Outstanding ExpenseAdd to respective expense (Debit)Liability Side
Prepaid ExpenseDeduct from respective expense (Debit)Asset Side
Accrued IncomeAdd to respective income (Credit)Asset Side
Unearned IncomeDeduct from respective income (Credit)Liability Side
DepreciationDebit side (P&L)Deduct from Asset
Bad Debts (New)Debit side (P&L)Deduct from Debtors
Provision for Doubtful DebtsDebit side (P&L)Deduct from Debtors
Manager's CommissionDebit side (P&L)Liability Side

Tip for MP Board Exams: Always solve adjustments given outside the trial balance first, as they have dual effects. Items inside the trial balance are recorded only once!