Final accounts with adjustments

A full question gives a trial balance and a list of adjustments. Work in this order.

• Total the trial balance first to check it agrees.
• Go through the adjustments and, for each, write its two places in the margin.
• Prepare the trading account, then the profit and loss account, then the balance sheet.
• Remember: every trial balance item is used once; every adjustment is used twice.

Trading account: opening stock, purchases and direct expenses (with any outstanding part added or prepaid part taken off) against sales and closing stock. Profit and loss account: the indirect expenses, adjusted the same way; bad debts and provisions; depreciation; interest on capital; and manager's commission last.

Balance sheet: capital + net profit + interest on capital − drawings − interest on drawings. Outstanding expenses and incomes received in advance are liabilities; prepaid expenses and accrued incomes are assets. Fixed assets are shown after depreciation, and debtors after further bad debts and provisions.

Watch for items that look like one thing but are another. Goods costing ₹1,000 taken by the owner are drawings (and are taken off purchases). Interest on a loan due but not paid is an outstanding expense: added to the interest and shown as a liability. Wages paid for erecting a new machine are part of the machine's cost: add them to machinery, not wages. A gross loss goes to the debit side of the profit and loss account.

Months, again. Yogita's insurance includes ₹170 for a policy running to 30 September 2017, with books closing on 31 March 2017. April to September is 6 months: 6/12 × 170 = ₹85 is prepaid. Deduct it from insurance and show it as an asset.

In the book's Illustration 3 (Shri R. Lal), working through every item this way gives a gross profit of ₹53,190, a net profit of ₹16,060 and a balance sheet total of ₹1,22,950.