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:
-
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.
-
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:
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