Adjustments in final accounts, with a solved example

An adjustment is a fact given after the trial balance. Because it is not yet in the books, it must be entered twice, once on each side of the double entry.

Why adjustments are needed

The trial balance shows what was recorded during the year. On the last day some things are still unrecorded: salaries due but not paid, insurance paid for next year, depreciation, stock in hand, debts likely to go bad. The accrual and matching principles require that the year's profit include all expenses and incomes that belong to the year and nothing that belongs to another year. Adjustments bring the books to that point.

The golden rule

An item inside the trial balance appears once in the final accounts. An adjustment given outside the trial balance appears twice.

Treatment of each adjustment

Adjustment	Adjusting entry	In Trading / P&L Account	In Balance Sheet
Closing stock	Closing Stock A/c Dr. To Trading A/c	Credit side of Trading A/c	Asset
Outstanding expense (due, unpaid)	Expense A/c Dr. To Outstanding Expense A/c	Add to the expense	Liability
Prepaid expense (paid in advance)	Prepaid Expense A/c Dr. To Expense A/c	Deduct from the expense	Asset
Accrued income (earned, not received)	Accrued Income A/c Dr. To Income A/c	Add to the income	Asset
Income received in advance	Income A/c Dr. To Income Received in Advance A/c	Deduct from the income	Liability
Depreciation	Depreciation A/c Dr. To Asset A/c	Debit side of P&L A/c	Deduct from the asset
Further bad debts	Bad Debts A/c Dr. To Debtors A/c	Add to bad debts in P&L A/c	Deduct from debtors
Provision for doubtful debts	P&L A/c Dr. To Provision for Doubtful Debts A/c	Debit side of P&L A/c	Deduct from debtors
Interest on capital	Interest on Capital A/c Dr. To Capital A/c	Debit side of P&L A/c	Add to capital
Interest on drawings	Capital A/c Dr. To Interest on Drawings A/c	Credit side of P&L A/c	Deduct from capital
Goods taken by owner	Drawings A/c Dr. To Purchases A/c	Deduct from purchases	Add to drawings
Loss of goods by fire (insured in part)	Loss A/c and Insurance Claim A/c Dr. To Trading A/c	Credit Trading A/c with full loss; debit P&L with loss not covered	Insurance claim as an asset
Manager's commission on net profit	Commission A/c Dr. To Outstanding Commission A/c	Debit side of P&L A/c	Liability

Solved example: Kaveri Traders with adjustments

Take the trial balance of Kaveri Traders from the final accounts page and prepare final accounts after these adjustments:

Closing stock ₹1,00,000.
Salaries outstanding ₹5,000.
Insurance prepaid ₹1,500.
Depreciate machinery and furniture at 10%.
Write off further bad debts ₹2,000 and create a provision for doubtful debts at 5% on debtors.
Commission earned but not yet received ₹1,000.
Allow interest on capital at 5%.

Working notes

Depreciation: machinery 10% of ₹1,50,000 = ₹15,000; furniture 10% of ₹50,000 = ₹5,000; total ₹20,000.
Debtors after further bad debts: ₹90,000 − ₹2,000 = ₹88,000. Provision at 5% = ₹4,400.
Interest on capital: 5% of ₹2,50,000 = ₹12,500.
The Trading Account is not touched by adjustments 2 to 7, so gross profit remains ₹2,10,000.

Dr. Profit and Loss Account for the year ended 31 March 2026 Cr.
Particulars	₹	Particulars	₹
To Salaries 60,000 + outstanding 5,000	65,000	By Gross profit b/d	2,10,000
To Rent	24,000	By Commission 5,000 + accrued 1,000	6,000
To Insurance 6,000 − prepaid 1,500	4,500
To Bad debts 2,000 + further 2,000	4,000
To Provision for doubtful debts	4,400
To Discount allowed	3,000
To Depreciation: machinery 15,000 + furniture 5,000	20,000
To Interest on capital	12,500
To Net profit transferred to Capital A/c	78,600
	2,16,000		2,16,000

Balance Sheet of Kaveri Traders as at 31 March 2026
Liabilities	₹	Assets	₹
Capital 2,50,000 + interest 12,500 + net profit 78,600 − drawings 30,000	3,11,100	Machinery 1,50,000 − depreciation 15,000	1,35,000
Bank loan	40,000	Furniture 50,000 − depreciation 5,000	45,000
Creditors	70,000	Closing stock	1,00,000
Outstanding salaries	5,000	Debtors 90,000 − 2,000 − provision 4,400	83,600
		Cash at bank	48,000
		Cash in hand	12,000
		Prepaid insurance	1,500
		Accrued commission	1,000
	4,26,100		4,26,100

Net profit falls from ₹1,20,000 to ₹78,600 once the adjustments are made, and the balance sheet totals ₹4,26,100. Each adjustment has appeared twice: check them one by one against the table above.

Special points

Adjustment inside the trial balance. If "outstanding salaries" appears in the trial balance, the adjusting entry has already been passed: show it only in the balance sheet.
Closing stock inside the trial balance (together with "adjusted purchases") is shown only in the balance sheet.
Provision on debtors is always calculated after deducting further bad debts.
Depreciation "per annum" on an asset bought during the year is charged only for the months held.
Interest on loan. If a 10% loan was outstanding all year and the trial balance shows less interest paid than a full year's, the balance is outstanding interest.
Manager's commission may be on net profit before charging the commission (profit × rate ÷ 100) or after charging it (profit × rate ÷ (100 + rate)).

Example of commission. Net profit before commission ₹1,10,000; commission 10%. Before charging: ₹11,000. After charging: ₹1,10,000 × 10 ÷ 110 = ₹10,000, which is 10% of the remaining ₹1,00,000.

Questions students ask

Why does an adjustment appear twice in final accounts?

Because it is not yet recorded in the books. Its double entry has two sides, and both must be shown: one in the Trading or Profit and Loss Account and one in the Balance Sheet.

Where is prepaid insurance shown?

It is deducted from insurance on the debit side of the Profit and Loss Account and shown as an asset in the Balance Sheet.

How is provision for doubtful debts calculated when there are further bad debts?

First deduct the further bad debts from debtors, then apply the percentage to the remaining debtors.