Financial Statements with Adjustments 1
Any information given outside the Trial Balance is called adjustment or additional information. It is important to note that every item appearing outside the trial balance should be treated at two places out of the three: Trading Account, Profit and Loss account and Balance Sheet.
1. CLOSING STOCK
Meaning:Â Â Closing stock means the unsold goods lying in store at the end of accounting year.
Treatment:
Closing Stock a/c         Dr.
    To Trading a/c
Two-fold effect of this adjustment will be:
1. Show on Credit side of the Trading account.
2. Shown on the asset side of Balance Sheet.
2. OUTSTANDING EXPENSES
Meaning: Outstanding expenses are the expenses which have been incurred & but not yet paid.
Treatment:Â
Expenses a/c             Dr.
    To outstanding expenses
Two-fold effect:
1. Shown on debit side of trading or profit & loss a/c (as the case may be, depending on the type of expense), by way of addition to particular expense.
2. Shown on liabilities side of Balance Sheet.
3. PREPAID EXPENSES
Meaning: Those expenses which have been paid in advance i.e., whose benefit will be available in future is called prepaid expenses.
Treatment:
Prepaid Expenses a/c    Dr.
     To Expenses a/c
Two-fold effect:
1. Shown in trading account or Profit & Loss a/c by way deduction from particular expense.
2. Shown on asset side of Balance Sheet.
4. ACCRUED INCOME
Meaning: That income which has been earned but not received during the accounting year is called accrued income.
Treatment:
Accrued Income a/c       Dr.
     To Income a/c
Two-fold effect:
1. Shown on credit side of P & L a/c.
2. Shown on asset side of Balance Sheet.
Financial Statements with Adjustments 1
5. INCOME RECEIVED IN ADVANCE
Meaning: Income received but not earned during accounting year is called income received in advance.
Treatment:
Income a/c                Dr.
     To Income Received in advance
Two-fold effect:
1. Shown on credit side of P & L a/c by the way of deduction from particular income.
2. Shown on liabilities side of Balance Sheet.
6. DEPRECIATION
Meaning: Depreciation is the reduction in the value of fixed asset due to its use, wear & tear.
Treatment:
Depreciation a/c           Dr.
    To Asset a/c
Two-fold effect:
1. Shown on debit side of P & L a/c.
2. Shown on the Asset side of the Balance Sheet by way of deduction from value of concerned asset.
(Appreciation means increase in the value of an asset and the treatment is exactly opposite to that of Depreciation i.e. credited in the Profit and Loss account and added to asset in the balance sheet.)