Establishing Structure for Adjusted Financial Statements A methodical layout is introduced by preparing a trading and profit & loss account on one page and a balance sheet on the other. The structure organizes figures from assets and liabilities alongside adjustment items. This clear framework sets the stage for accurately incorporating additional figures into the final accounts.
Clearly Identifying Adjustment-Related Items Items such as depreciation, salary, insurance, and stock are marked with identifiable symbols to ensure no adjustment is overlooked. Capital, drawings, debtors, and creditors are recorded with precision to guide subsequent entries. This careful notation reinforces accuracy during the detailed adjustment process.
Provision for Doubtful Debts Calculation A 5% provision is calculated on the debtors to account for anticipated bad debts, reducing their stated value. The adjustment is made by deducting the computed provision from the debtor’s total and reflecting it as an expense. Any pre-existing provision is subtracted to arrive at the net required adjustment.
Computing Loan Interest and Outstanding Amount For a loan of Rs.10,000 at 6%, the interest charge amounts to Rs.600, but only Rs.300 is paid, leaving an outstanding amount of Rs.300. The unpaid interest is recorded as a liability, distinguishing between the expense incurred and the payment made. This calculation underscores how interest adjustments affect the financial position.
Adjusting Wages and Recognizing Prepayments Wages covering 15 months are analyzed to isolate the extra three months paid beyond the fiscal year-end. The surplus wages are treated as a prepaid expense and recorded as an asset rather than an expense for the current period. This adjustment differentiates work already incurred from amounts paid in advance.
Depreciation Adjustments and Carriage Treatment Depreciation is applied to a computer and furniture at rates of 10% and 5% respectively, reducing asset values accordingly. Carriage costs are divided between the trading account for inward expenses and the profit & loss account for outward charges. These adjustments ensure that asset values and cost allocations accurately reflect economic reality.
Comprehensive Treatment of Salary, Rent, and Additional Expenses Outstanding salary is added to current expenses and simultaneously recorded as a liability, while rent and bad debt adjustments are carefully integrated. The adjustment for bad debts involves combining direct bad debts with the calculated provision to yield a net figure. Additional entries such as advertisement expenses and discount received are also balanced to maintain proper income and expense classification.
Final Profit Computation and Balance Sheet Reconciliation The gross profit is determined by incorporating closing stock, adjusted wages, and other pertinent items into the trading and profit & loss accounts. Net profit is then computed after deducting all adjusted expenses and is transferred to the capital account. A meticulous reconciliation confirms that the balance sheet tallies, underscoring the accuracy of the overall adjustments.