Financial Statements with Adjustments 4
15. RESERVE FUND
Reserve is created out of profit & Loss A/c and thus is an appropriation of net profit for strengthening the financial position of the business.
Treatment:
Profit & Loss A/c Dr.
To Reserve Fund A/c
Two-fold effect:
1. Shown on debit side of P&L A/c.
2. Shown on the liabilities side of Balance Sheet.
16. GOODS DISTRIBUTED AS FREE SAMPLES/ CHARITY
To promote the sale of goods, some of the produced goods are distributed as free samples.
Treatment:
Advertisement (charity) A/c Dr.
To Purchase A/c
Two-fold effect:
1. Deducted from purchases.
2. Shown on debit side of P&L A/c.
Financial Statements with Adjustments 4
17. GOODS TAKEN BY PROPRIETOR FOR PERSONAL USE
Goods taken by the proprietor for his personal use will be considered as drawings.
Treatment:
Drawings A/c Dr.
To Purchases A/c
Two-fold effect:
1. Deducted from purchases.
2. Deducted from Drawings.
18. MANAGER'S COMMISSION
To increase the profit, manager is given some percentage of commission on profits. can be given at a certain percentage on the net profits before charging such commission or after charging such commission.
Treatment:
Profit & Loss A/c Dr.
To Commission Payable
Two-fold effect:
1. Shown on debit side of P&L A/c.
2. Shown on the liabilities side of Balance Sheet.
Calculation:
1. Before charging such commission:
Commission= Net Profit *(rate/100)
2. After charging such commission:
Commission= Net Profit *(rate/100+rate)
Financial Statements with Adjustments 4
19. GOODS ON SALE OR APPROVAL BASIS
Sometimes goods are sold to customers on approval basis. If they approve, it will become sale. If such goods are lying with customers on last day of the accounting year and these can be returned, it should be treated as stock lying with customers.
Treatment:
1. Sales A/c Dr.
To debtor's A/c (with sales price)
2. Stock A/c Dr.
To trading A/c (at cost Price of goods)
Two-fold effect:
1. Credit side of trading account: (1) Sales minus stock at sales price (2) Closing stock plus stock at cost price.
2. Shown on assets side: (1) deduction from sundry debtors at sale price (2) add stock at cost to stock on the assets side of balance sheet.