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Adjustments and Their Effect on Financial Statements:

Majority of the business enterprises are preparing their financial statements in statement form. On this page effect of adjustment on income statement is discussed to meet the requirements of modern business.

Outstanding Expenses or Accrued Expenses:

(a). If the outstanding expenses are non-recurring i.e., direct expenses:

Outstanding Expenses
Added to net purchases in cost of goods sold schedule in income statement Shown in the balance sheet under the head of current liabilities

(b). If the outstanding expenses are recurring i.e., operating expenses:

Outstanding Expenses
Deducted from gross income under the head of operating expenses in income statement Shown in the balance sheet under the head of current liabilities

Prepaid Expenses or Unexpired Expenses or Expenses Paid in Advance:

Prepaid Expenses
Expenses expired are deducted from gross profit under the head of operating expenses in income statement Unexpired expenses are shown in the balance sheet under the head of current assets

Accrued Revenue or Revenue Receivable:

Accrued Revenue
Added to operating income under the head of other revenues in income statement Accrued revenue is recorded as current asset in balance sheet

Unearned Revenue or Revenue Received in Advance:

Unearned Revenue
revenue earned is added to operating income under the head other revenues in income statement Unearned revenue is shown in balance sheet under the head of current liabilities

Depreciation of Assets:

Depreciation
Deducted from gross income under the head operating expenses in income statement Shown under the head of fixed assets in the balance sheet as deduction from the concerned assets

Note:

  1. If depreciation expense is given on debit side of trial balance then it is recorded only in income statement under the head of office and administration expenses.

  2. If accumulated depreciation is given on credit side of trial balance then this balance is added in current year's depreciation and total is deducted from concerned asset in balance sheet.

Interest on Capital:

Interest on Capital
Deducted from operating income under the head of financial and other expenses in income statement Shown on the liability side of balance sheet "as addition to capital"

Interest on Drawings:

Interest on Drawings
Added to operating income under the head of other revenues in income statement Added to drawings and total drawings are deducted from capital on liability side of balance sheet

Closing Inventory:

Closing Inventory
Deducted from cost of goods available for sale in income statement Shown as current asset in balance sheet

Allowances for Uncollectible:

Allowances for Uncollectible
In selling expenses bad debts/uncollectible are added to allowance for uncollectible required and from total balance existing allowance for uncollectible is deducted In balance sheet allowance for uncollectible required is deducted from accounts receivables

Relevant Articles:

Income statement
Cost of Goods Sold Statement
Cost of Goods Manufactured Statement
Balance Sheet - Report Form
Difference between Income Statement and Trading and Profit and Loss Account
Adjustments and their Effect on Financial Statements
Evaluation of Financial Statements

 

 

A D V E R T I S E M E N T

 

Financial Accounting Topics


  Introduction to Accounting
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  Transactions and Accounting Equation
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  Analysis of Business Transactions
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  Journal, Ledger and Trial Balance
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  Accounting for Bills of Exchange
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  Special Journals
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  Cash Book
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Bank Reconciliation Statement
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  Final Accounts
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  Work Sheet
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  Capital and Revenue Items
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  Valuation of Inventories
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  Accounts of Non-profit Making Organizations
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  Statement of Cash Flows
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  Accounting Ratios Analysis
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  Depreciation, Provisions and Reserves
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  Accounting Dictionary
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  Financial Calculators
 
 
 
Managerial Accounting Topics

  Financial Statements
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  Cost Volume Profit Relationship
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  Variable Costing System
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  Materials and Inventory Cost Control
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  Activity Based Costing System
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  Standard Costing and Variance Analysis
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  Balanced Scorecard
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  Capital Investment Analysis/Capital Budgeting
 

 

 

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