October 09, 2018

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Users of Financial Statements and adjustments in Accounts

Profit and loss

Financial Statement


“A Financial Statement is the organized and summarized detailed information about the financial position and performance of the business.

  • Interested Users of Financial Statements.


Users Information Requirement
Investors. They need information to help them determine whether they should buy, hold or sell. Shareholders are also interested in information which enables them to assess the ability of the entity to pay dividends.
Lenders Lenders are interested in information that enables them to determine whether their loans, and the interest attaching to them, will be paid when due.
Creditors Suppliers and other creditors are interested in information that enables them to determine whether amounts owing to them will be paid when due.
Customers Customers have an interest in information about the continuance of an entity, especially when they have a long-term involvement with entity.
Governments Governments and their agencies are interested in the allocation of resources and, therefore, the activities of entities.

Adjustments in Financial Statement

Trial Balance


S.No Items given in Trial Balance Treatment in Profit & Loss A/c or Other Accounts Treatment in Balance Sheet
(a) Closing Stock  

Shown on the asset side as current asset.
(b) Outstanding Expenses/Accrued Expenses

Shown on the liability side as current liability.
(c) Prepaid Expenses  

Shown on the asset side as current asset.
(d) Accrued Income  


Shown on the asset side as current asset.
(e) Unearned Income  

Shown on the liability side as current liability.
 

(f)

 

Depreciation

Shown on the debit side of P&L A/c as a separate item.
(g) Bad Debts if no Provision for Doubtful Debts A/c appears Shown on the debit side of P&L A/c as a separate item.
(h) Bad Debts if Provision for Doubtful Debts A/c appears Shown on the debit side of Provision for Doubtful Debts A/c.
(i) Discount allowed if no Provision for Discount on Debtors A/c Shown on the debit side of P&L A/c as a separate item.
(j) Discount allowed if Provision for Discount on Debtors A/c appears Shown on the debit side of Provision for Discount on Debtors A/c.
 

(k)

Discount received if no Reserve for Discount on Creditors  A/c appears Shown on the credit side of P&L A/c as a separate item.


(l)
Discount received if Reserve for Discount on Creditors  A/c appears

 

Shown on the credit side of Reserve for Discount on Creditors A/c.
 

(m)

 

Interest on Capital

Shown on the debit side of P&L A/c as a separate item.
 

(n)

 

Interest on Drawings

Shown on the credit side of P&L A/c as a separate item.

Treatment of items of adjustment appearing outside the Trial Balance


Adjustment Treatment in Trading A/c Treatment in Profit & Loss A/c Treatment in Balance Sheet
Closing Stock Shown on the credit side Shown on the asset side as current asset
Outstanding Expenses Added to the respective direct expense on the debit side Added to the respective indirect expense on the debit side Shown on the liability side as current liability
Prepaid Expenses Deducted from the respective direct expense on the debit side Deducted from the respective indirect expense on the debit side Shown on the asset side as current asset
Accrued Incomes Added to the respective income on the credit side Shown on the asset side as current asset
Depreciation Shown on the debit side as a separate item Deducted from the respective fixed asset under asset side of the balance sheet
Bad debts Shown on the debit side as an addition to bad debts Deducted from the debtors under asset side of the balance sheet
Provision for doubtful debts Shown on the debit side as a separate item Deducted from the debtors under asset side of the balance sheet
Provision for discount on debtors Shown on the debit side as a separate item Deducted from the debtors under asset side of the balance sheet
Abnormal loss of stock Shown on the credit side as a separate item The value of irrecoverable stock is shown on the debit side as a separate item Amount due to insurance company is shown as current assets
Goods sent on approval Shown on the credit side by way of deduction from sales and addition to closing stock
1)       Shown on the asset side by way of deduction from debtors.

2)       Shown on the asset side by way of addition to closing stock.

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