Académique Documents
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Adjustments are nothing but transactions relating to the business which have not been journalised. Therefore, to deal w
adjustments one needs to understand the journal entry to be recorded if the transaction representing the adjustment is to
recorded in the books of accounts.
The adjustments relating to outstanding/prepaid expenses and pre-received/receivable incomes are dealt with here.
Outstanding Expenses
At the end of the accounting period, there may be expenses which have become due but have not yet been paid. If the organisation
following the mercantile system of accounting, these expenses are to be brought into account.
Debit » Expenditure a/c
"Expenditure a/c" is a nominal account with a debit balance. The balance in the "Expenditure a/c" generally indicates the total amou
paid on account of the expenditure during the current accounting period.
To bring the expenditure that has not yet been brought into account into the books, the relevant expenditure account h
to be debite
[Expenditure a/c – Nominal a/c – Debit all Expenses and Losses.]
"Expenses Outstanding a/c" is a personal account with a credit balance. The balance in the "Expenses Outstanding a
indicates the amount that is owed by the organisation on account of the expenditure unpaid.
The amount of expenditure that has not yet been paid is a liability for the organisation. The persons to whom t
organisation owes is its creditor. As such, the amount of expenditure outstanding that has not yet been taken into t
books is credited to the "Expenditure Outstanding a/c
[Outstanding Expenditure a/c – Personal a/c – Credit the benefit giver.]
Journal in the books of M/s ____ for the period from 1st July 2005 to 30th June 2006
Credit
V/R Debit Amount
Date Particulars L/F Amount
No. (in Rs)
(in Rs)
1st to 30th – Expenditure a/c Dr – xxx
To Expenditure Outstanding a/c – xxx
Adjustment
The amount of expenditure outstanding is to be
1. Added to the relevant expenditure on the debit side of the "Trading a/" or "Profit & Loss a/c".
2. Shown as a liability on the liabilities side of the balance sheet.
Explanation/Illustration » Hide/Show
Expenses Prepaid
At the end of the accounting period, there may be expenses which have been paid in advance. These are expenses which are paid
advance and would be adjusted in the relevant expenditure during the subsequent accounting periods.
Advances paid are treated in a different manner from expenses prepaid, the difference
being that the advances are recoverable whereas expenditure prepaid are realised by adjusted them in the amounts to be paid
the future towards the expenditure.
"Expenditure a/c" is a nominal account with a debit balance. The balance in the "Expenditure a/c" generally indicates t
total amount paid on account of the expenditure during the current accounting period.
On the assumption that the payments towards the expenditure include the expenditure prepaid, the expenditure has to
adjusted (reduced) to ascertain the actual expenditure chargeable for the current period.
"Expenditure a/c" shows a debit balance and as such to reduce it, the "Expenditure a/c" has to be credite
[Expenditure a/c – Nominal a/c – Credit all Incomes & Gains.]
The prepaid expenditure is indicative of an amount that is owed to the organisation by the person or organisation to who
it has been prepaid. The persons who owe to the organisation are its debtors.
Journal in the books of M/s ____ for the period from 1st July 2005 to 30th June 2006
Credit
V/R Debit Amount
Date Particulars L/F Amount
No. (in Rs)
(in Rs)
1st to 30th – Expenditure Prepaid a/c Dr – xxx
To Expenditure a/c – xxx
Adjustment
The amount of expenditure prepaid is to be
1. Deducted from the relevant expenditure on the debit side of the "Trading a/" or "Profit & Loss a/c".
2. Shown as an asset on the assets side of the balance sheet.
Explanation/Illustration » Hide/Show
Debit Credit
L/
Particulars Amount Amount
F
(in Rs) (in Rs)
Expenditure a/c –
–
Expenditure Prepaid a/c 8,000
Total
The "Expenditure a/c" being a nominal account is created anew in every accounting period. Thus it has no balance on the
opening day of the accounting period.
Debit Credit
L/
Particulars Amount Amount
F
(in Rs) (in Rs)
Expenditure a/c –
Total
The balance in the "Expenditure Prepaid a/c" at the beginning of the accounting period represents the expenditure prepaid at
the end of the previous period brought forward. This balance is transferred to the "Expenditure a/c" at the beginning of the
accounting period.
Journal in the books of M/s ____ for the period from 1st Jan 2005 to 31st Dec 2005
Credit
V/R Debit Amount
Date Particulars L/F Amount
No. (in Rs)
(in Rs)
1st to 31st – Expenditure a/c Dr – 86,000
To Cash/Bank a/c – 86,000
[For the amount paid towards the expenditure
relating to the current period as well as the
expenditure prepaid.]
Dr Expenditure a/c Cr
Amount Amount
Date Particulars J/F Date Particulars J/F
(in Rs) (in Rs)
01/01/0 To Exp. Prep. a/c – 8,000 31/12/0 By Bal c/d – 94,000
5 To Cash/Bank a/c – 86,000 5
1st-31st
94,000 94,000
31/12/0
To bal b/d – 94,000
5
Debit Credit
L/
Particulars Amount Amount
F
(in Rs) (in Rs)
Total
The "Expenditure Prepaid a/c" does not carry any balance till the entry for recording the total expenditure prepaid is recorded at
the end of the accounting period.
Journal in the books of M/s ____ for the period from 1st Jan 2005 to 31st Dec 2005
Credit
V/R Debit Amount
Date Particulars L/F Amount
No. (in Rs)
(in Rs)
31/12/05 – Expenditure Prepaid a/c Dr – 6,000
To Expenditure a/c – 6,000
Method II (alternative): Using Only "Expenditure a/c"
The prepaid expenditure is shown as a balance in the "Expenditure a/c" itself, thereby treating the "Expenditure a/c" as a
personal account for the purpose of making up the balance sheet. The "Expenditure a/c" appearing in the Balance Sheet is a
personal account and for all other purposes it is a nominal account.
Trial Balance of M/s ___ as on 1st Jan 2005
Debit Credit
L/
Particulars Amount Amount
F
(in Rs) (in Rs)
Total
The "Expenditure a/c" is a personal account for the purpose of preparation of the opening balance sheet and is treated a
nominal account all throughout the accounting period.
Thus, the debit balance shown in the account on the opening day is indicative of a prepaid expenditure at the end of the
previous period.
Dr Expenditure a/c Cr
Amount Amount
Date Particulars J/F Date Particulars J/F
(in Rs) (in Rs)
01/01/0 To Bal b/d – 8,000 31/12/0 By P/L a/c – 88,000
5 To Cash/Bank a/c – 84,000 5 By Bal c/d – 6,000
1st-31st
94,000 94,000
01/01/0
To bal b/d – 6,000
6
The closing debit balance in the "Expenditure a/c" indicates the total expenditure pre-paid at the end of the accounting
period. Even in this case, the total amount paid during the current period is to be treated as paid for the expenditure
(without segregating between payment for the current period and payment for the subsequent periods.)
The postings in the "Trading a/c" or "Profit and Loss a/c" would be the same as above with the only difference being in the
name of the account head that is shown in the balance sheet. "Expenditure a/c" would appear in the balance sheet instead of
the "Expenditure Prepaid a/c".
Adjustments are generally required for transactions which are not yet recorded at the time of making up the final accounts i.e.
towards the end of the accounting period.
For the prepaid expenditure to be recorded at the end of the accounting period.
The net effect would give an understanding on where the amounts are to be adjusted.
1. deducted from the relevant expenditure on the debit side of the "Trading a/" or "Profit & Loss a/c".
2. Shown as an asset on the assets side of the balance sheet.
Expenditure 94,000
(−) Pre paid (cl). 6,000
Total Exp 88,000
Adjustments :: Prereceived/Receivable Income
Adjustments are nothing but transactions relating to the business which have not been journalised. Therefore, to deal w
adjustments one needs to understand the journal entry to be recorded if the transaction representing the adjustment is to
recorded in the books of accounts.
Incomes Receivable
At the end of the accounting period, there may be incomes which have become due but have not yet been received. If the organisti
is following the mercantile system of accounting, these incomes are to be brought into account.
Credit » Income a/c
"Income a/c" is a nominal account with a credit balance. The balance in the "Income a/c" generally indicates the to
amount received on account of the income during the current accounting period.
To bring the income that has not yet been brought into account into the books, the relevant income account has to
credited.
[Income a/c – Nominal a/c – Credit all Incomes and Gains.]
The income receivable is indicative of an amount that is owed to the organisation by a person or organisation. The perso
who owe to the organisation are its debtors.
Journal in the books of M/s ____ for the period from 1st April 2005 to 31st March 2006
Credit
V/R Debit Amount
Date Particulars L/F Amount
No. (in Rs)
(in Rs)
1st to 30th – Income Receivable a/c Dr – xxx
To Income a/c – xxx
[For the amount income relating to the current
period, not yet received brought into the
books.]
Adjustment
The amount of income receivable is to be
1. Added to the relevant income on the credit side of the "Trading a/" or "Profit & Loss a/c".
2. Shown as an asset on the assets side of the balance sheet.
Explanation/Illustration » Hide/Show
Income Prereceived
At the end of the accounting period, there may be incomes which have been received in advance. These are incomes which a
received in advance and would have to be adjusted in the relevant income during the subsequent accounting periods.
Advances received are treated in a different manner from incomes prereceived, the difference being that the advances are repayab
whereas incomes prereceived are liquidated by adjusting them in the amounts to be received in the future towards the income.
"Income a/c" is a nominal account with a credit balance. The balance in the "Income a/c" generally indicates the to
amount received on account of the income during the current accounting period.
On the assumption that the receipts towards the income include the income prereceived, the income has to be adjust
(reduced) to ascertain the actual income that can be considered for the current period.
"Income a/c" shows a credit balance and as such to reduce it, the "Income a/c" has to be debite
[Income a/c – Nominal a/c – Debit the benefit receiver.]
The income prereceived is indicative of an amount that is owed by the organisation to another person or organisation. T
persons to whom the organisation owes are its creditors.
Journal in the books of M/s ____ for the period from 1st April 2005 to 31st March 2006
Credit
V/R Debit Amount
Date Particulars L/F Amount
No. (in Rs)
(in Rs)
1st to 31st – Income a/c Dr – xxx
To Income Prereceived a/c – xxx
Adjustment
The amount of income prereceived is to be
1. Deducted from the relevant income on the credit side of the "Trading a/" or "Profit & Loss a/c".
2. Shown as a liability on the liabilities side of the balance sheet.
Explanation/Illustration » Hide/Show
Debit Credit
L/
Particulars Amount Amount
F
(in Rs) (in Rs)
Income a/c –
–
Income Prereceived a/c 4,300
Total
The "Income a/c" being a nominal account is created anew in every accounting period. Thus it has no balance on the opening
day of the accounting period.
Debit Credit
L/
Particulars Amount Amount
F
(in Rs) (in Rs)
Income a/c –
Total
The balance in the "Income Prereceived a/c" at the beginning of the accounting period represents the prereceived income at the
end of the previous period brought forward. This balance is transfered to the "Income a/c" at the beginning of the accounting
period.
Journal in the books of M/s ____ for the period from 1st April 2005 to 31st March 2006
Credit
V/R Debit Amount
Date Particulars L/F Amount
No. (in Rs)
(in Rs)
1st to 31st – Cash'/Bank a/c Dr – 58,000
To Income a/c – 58,000
Debit Credit
L/
Particulars Amount Amount
F
(in Rs) (in Rs)
Total
The "Income Prereceived a/c" does not carry any balance till the entry for recording the total income prereceived is recorded at
the end of the accounting period.
Journal in the books of M/s ____ for the period from 1st April 2005 to 31st March 2006
Credit
V/R Debit Amount
Date Particulars L/F Amount
No. (in Rs)
(in Rs)
31/03/06 – Income a/c Dr – 2,800
To Income Prereceived a/c – 2,800
Method II (alternative): Using Only "Income a/c"
The prereceived income is shown as a balance in the "Income a/c" itself, thereby treating the "Income a/c" as a personal
account for the purpose of making up the balance sheet. The "Income a/c" appearing in the Balance Sheet is a personal account
and for all other purposes it is a nominal account.
Trial Balance of M/s ___ as on 1st April 2005
Debit Credit
L/
Particulars Amount Amount
F
(in Rs) (in Rs)
Total
The "Income a/c" is a personal account for the purpose of preparation of the opening balance sheet and is treated a nominal
account all througout the accounting period.
Thus, the credit balance shown in the account on the opening day is indicative of a prereceived income at the end of the
previous period.
Dr Income a/c Cr
Amount Amount
Date Particulars J/F Date Particulars J/F
(in Rs) (in Rs)
31/03/0 To P/L a/c – 59,500 01/04/0 By Bal b/d – 4,300
6 To Bal c/d – 2,800 5 By Cash/Bank a/c – 58,000
1st-31st
62,300 62,300
01/04/0
By bal b/d – 2,800
6
The closing debit balance in the "Income a/c" indicates the total income prereceived at the end of the accounting period. Even in
this case, the total amount received during the current period is to be treated as having been received for the income (without
seggregating between receipt for the current period and receipt for the subsequent periods.)
The postings in the "Trading a/c" or "Profit and Loss a/c" would be the same as above with the only difference being in the
name of the account head that is shown in the balance sheet. "Income a/c" would appear in the balance sheet instead of the
"Income Prereceived a/c".
Adjustments are generally required for transactions which are not yet recorded at the time of making up the final accounts i.e.
towards the end of the accounting period.
For the prereceived income to be recorded at the end of the accounting period.
The net effect would give an understanding on where the amounts are to be adjusted.
1. deducted from the relevant income on the credit side of the "Trading a/" or "Profit & Loss a/c".
2. Shown as a liability on the liabilities side of the balance sheet.
Income 62,300
(−) Pre Recd (cl). 2,800
Total Income 59,500
Balance Sheet of M/s ______ as on 31st March 2006
Drawings of stock implies the Stock/Goods taken away by the proprietor or the partner for personal purposes. These
goods are to be valued at cost and not at their selling prices.
The value of goods taken away being drawings has to be debited to the "Drawings a/c" which represents
the owner of the business.
[Drawings a/c – Personal a/c – Debit the benefit receiver.]
Credit »
The value of goods withdrawn by the proprietor represents the value of stock that has not been used for
trading purposes. To reveal the cost of goods sold, the value of stock unused for trading activity is to be
deducted from the total value of goods.
For this the following ledger account would be credited depending on the time of recording the transaction,
what comprises the value of stock drawn and the account in which the related value exists at the time of
recording the entry.
o Trading a/c
Generally, at the end of the accounting period, the balances (amounts) in all the ledger accounts
which go into the value of goods/stock, are closed by transfer to the "Trading a/c". This amounts
to debiting the "Trading a/c" with the total value of goods/stock.
Thus the value of stock drawings has to be credited to the "Trading a/c" in which the total value
of goods/stock is existing as a debit balance.
Journal/Ledger » Hide/Show
o Goods Consumed a/c
Where the "Goods Consumed a/c" is used, the balances (amounts) in all the ledger accounts
which go into the value of goods/stock (including opening stock) are transferred to it. Thus the
"Goods Consumed a/c" would hold the total value of stock (as a debit balance).
Thus the value of stock drawings has to be credited to the "Goods Consumed a/c" in which the
total value of goods/stock is existing as a debit balance.
Journal/Ledger » Hide/Show
o Purchases a/c
Where the following conditions exist, we can credit "Purchases a/c" with the value of stock
drawings.
The stock drawn is physically relatable to the stock that has been purchased during the
current period.
There are no direct expenses in relation to the stock purchased during the current period
(Or)
The value of stock drawn does not include the direct expenses incurred during the
current period
Journal/Ledger » Hide/Show
o Stock Drawings a/c
Where such transactions occur frequently, the organisation may create a controlling account by
name "Stock Drawings a/c". This is a nominal account that gives the information relating to the
total value of stock withdrawn by the proprietor or all the partners during the accounting period.
Journal/Ledger » Hide/Show
The "Drawings a/c" is a personal account intended to give the information relating to the drawings made by the
proprietor separate from the capital account. This account may be closed by transfer to the "Capital a/c" at the end
of the accounting period, whereby the account is created anew every year. Alternatively, it may be carried forward to
the subsequent periods just like any other personal account.
When the "Drawings a/c" is carried forward, it should be shown on the assets side of the balance sheet (as it has a
debit balance). However, it shown as a deduction from its related account, the "Capital a/c" on the liabilities side of
the balance sheet.
Capital xx
(+)Net Profit xx xxx Drawings 28,000
However, to derive the information relating to the net amount relating to the proprietor within the organisation, it is
shown as a deduction from its related account, the "Capital a/c", on the liabilities side of the balance sheet.
Adjustment during Final Accounting
Adjustment is bringing in the effect of the transactions through mathematical operations of addition and subtraction.
The adjustments to be made can be found out by ascertained the net effect of the journal entries to be recorded.
Adjustments are generally required for transactions which are not yet recorded at the time of making up the final
accounts i.e. towards the end of the accounting period.
1) Drawings a/c
Dr
To Trading a/c Capital a/c Dr
To Trading a/c
2) Capital a/c Dr
To Drawings a/c
Since adjustment is needed at the end of the accounting period, we assume that the journal entry to record the
drawings of stock is
Dr. Drawings a/c
Cr. Trading a/c
The net effect would give an understanding on where the amounts are to be adjusted.
Dr Trading a/c Cr
Amount Amount Amount Amount
Particulars Particulars
(in Rs) (in Rs) (in Rs) (in Rs)
To Purchases 8,48,000
(−) Drawings 28,000 8,20,000
The stock that is used by the proprietor or the owner for personal purposes represents the stock that is used within
the organisation. This is because the organisation and owners are treated one and the same for the purpose of
identifying transactions that generate income. As such the drawings of stock have to be valued at cost based on the
principle that "one cannot make a profit out of a transaction with one self".
Stocks that the organisation deals with may be used in the process of building up an asset. Say, for example a trader who
is trading in Rose Wood may use some wood for getting office furniture made up.
Based on the principle for valuation of an asset, all the expenses incurred before bringing the asset into usable
condition are to form part of the value of the asset.
Thus the value of goods used in the construction of the asset would be debited to the relevant "Asset a/c".
[Asset a/c – Real a/c – Debit what comes in.]
Credit »
The value of goods used in the construction of the asset represents the value of goods/stock that has not been
used for trading purposes. To reveal the cost of goods sold, the value of stock unused for trading activity is to be
deducted from the total value of goods.
For this the following ledger account would be credited depending on the time of recording the transaction, what
comprises the value of stock drawn and the account in which the related value exists at the time of recording the
entry.
o Trading a/c
Generally, at the end of the accounting period, the balances (amounts) in all the ledger accounts which go
into the value of goods/stock, are closed by transfer to the "Trading a/c". This amounts to debiting the
"Trading a/c" with the total value of goods/stock.
Thus the value of stock used in the construction of the asset has to be credited to the "Trading a/c" in
which the total value of goods/stock is existing as a debit balance.
Journal/Ledger » Hide/Show
o Goods Consumed a/c
Where the "Goods Consumed a/c" is used, the balances (amounts) in all the ledger accounts which go into
the value of goods/stock (including opening stock) are transferred to it. Thus the "Goods Consumed a/c"
would hold the total value of stock (as a debit balance).
Thus the value of stock used in the construction of assets has to be credited to the "Goods Consumed a/c"
in which the total value of goods/stock is existing as a debit balance.
Journal/Ledger » Hide/Show
o Purchases a/c
Where the following conditions exist, we can credit "Purchases a/c" with the value of stock used in the construction of an
asset.
The stock used in the construction of the assets is physically relatable to the stock that has been
purchased during the current period.
There are no direct expenses in relation to the stock purchased during the current period
(Or)
The value of stock used in the construction of the assets does not include the direct expenses incurred during the current
period
Journal/Ledger » Hide/Show
o Stock used for Assets a/c
Where such transactions occur frequently, the organisation may create a controlling account by name "Stock used for Assets
a/c". This is a nominal account that gives the information relating to the total value of stock used in construction of assets
during the accounting period.
Journal/Ledger » Hide/Show
The value of goods/stock enters the value of the asset on the date on which the transaction takes place. This is on the
assumption that the asset is brought into use on the same date (the date from which it is to be depreciated).
Where the transaction takes place on a specific date, the value of the asset built up by the value of stock should be
depreciated for the relevant period.
Illustration » Hide/Show
Where the transaction takes place towards the beginning of the accounting period, the value of the asset built up by the value
of stock should be depreciated for the complete accounting period.
Illustration » Hide/Show
Not Depreciated
Where the transaction takes place towards the end of the accounting period, the value of the asset built up by the value of
stock should not be depreciated during the accounting period.
Illustration » Hide/Show
Note
1. Where there is no specific indication with regard to the date of the transaction, it may be assumed to have taken
place
Towards the beginning of the accounting period, when the asset value has to be depreciated in full
o Towards the end of the accounting period, when the asset value should not be depreciated
o Somewhere in between the accounting period, when the asset value is depreciated for a period equal to
half the accounting period.
2. Generally such transactions relating to adjustments to be made in relation to the stock used are recorded towards
the end of the accounting period mostly at the time of making up the final accounts. Thus the date of recording the
transaction may not be the date on which the asset has been brought into use. This is to be noted when we need to
calculate depreciation based on the time of usage of the asset.
Adjustments are generally required for transactions which are not yet recorded at the time of making up the final accounts
i.e. towards the end of the accounting period.
Since adjustment is needed at the end of the accounting period, we assume that the journal entry to record the usage of
stock in the construction of an asset is
Dr. Assets a/c
Cr. Trading a/c
The net effect would give an understanding on where the amounts are to be adjusted.
Dr Trading a/c Cr
Amount Amount Amount Amount
Particulars Particulars
(in Rs) (in Rs) (in Rs) (in Rs)
To Purchases 15,75,000
(−) Stock (asset) 1,40,000 14,35,000
The stock that is used in the construction of an asset represents the stock that is used within the organisation. This is because
the asset so built is also owned by the organisation. As such the drawings of stock have to be valued at cost based on the
principle that "one cannot make a profit out of a transaction with one self".
Stocks that the organisation deals with may be lost on account of abnormal reasons. Abnormal loss stocks are to be valued at cost.
The principles that are used in the valuation of assets are used even in the case of valuing abnormal loss stocks.
Thus a temporary asset account by name "Abnormal Loss Stock a/c" is created and used for this purpos
[Abnormal Loss Stock a/c – Real a/c – Debit what comes in.]
Many a times we use the words "Abnormal Loss a/c" and consider it a nominal account which is also an accepted practic
We assume it to be a real account to enable an easier understanding of the transactions involving abnormal loss stocks.
Some times a name that indicates the reason for the loss (like Stock Lost by Fire Accident) is preferred in place of
general name like "Abnormal Loss". Whatever may be the name we give it and the nature we attribute to the account, it
a temporary account.
Credit »
The value of abnormal loss stock represents the value of goods/stock that has not been used for trading purposes.
reveal the cost of goods sold, the value of stock unused for trading activity is to be deducted from the total value of good
For this the following ledger account would be credited depending on the time of recording the transaction, what compris
the value of stock drawn and the account in which the related value exists at the time of recording the entry.
o Trading a/c
Generally, at the end of the accounting period, the balances (amounts) in all the ledger accounts which go into t
value of goods/stock, are closed by transfer to the "Trading a/c". This amounts to debiting the "Trading a/c" w
the total value of goods/stock.
Thus the value of abnormal loss stock has to be credited to the "Trading a/c" in which the total value
goods/stock is existing as a debit balance.
Journal/Ledger » Hide/Show
o Goods Consumed a/c
Where the "Goods Consumed a/c" is used, the balances (amounts) in all the ledger accounts which go into t
value of goods/stock (including opening stock) are transferred to it. Thus the "Goods Consumed a/c" would ho
the total value of stock (as a debit balance).
Thus the value of abnormal loss stock has to be credited to the "Goods Consumed a/c" in which the total value
goods/stock is existing as a debit balance.
Journal/Ledger » Hide/Show
o Purchases a/c
Where the following conditions exist, we can credit "Purchases a/c" with the value of abnormal loss stock.
The stock lost on account of abnormal reasons is physically relatable to the stock that has been purchas
during the current period.
There are no direct expenses in relation to the stock purchased during the current perio
(Or)
The value of abnormal loss stock does not include the direct expenses incurred during the current perio
Journal/Ledger » Hide/Show
o Stock Losses (Abnormal)
Where such transactions occur frequently, the organisation may create a controlling account by name "Stock Lo
a/c". This is a nominal account that gives the information relating to the total value of stock that has been lost
account of abnormal reasons during the accounting period.
Journal/Ledger » Hide/Show
The salvaged stock may be in a saleable condition or completely useless. There may be instances when the salvaged sto
can be brought into saleable condition by bearing certain expenditure.
The salvaged stock may be directly sold (if in a saleable condition) or after getting them repaired or refurbished.
Where the stock has been insured with one or more insurance companies, the insurance company would pay the amount
compensation based on the contract of insurance.
The contract of insurance being a contract of indemnity, the total amount of compensation received from all the insuran
companies together would be not more than the total loss incurred.
Commission on Sale
Where there is a commission being paid or payable on the sale of abnormal loss stock it may be
o Deducted from the sale proceeds received/receivable and only the net proceeds may be brought into account
o Recorded just like any other expenditure that goes into the value of the Abnormal Loss Stock
The "Abnormal Loss Stock a/c" may carry a balance after having sold the salvaged stock and realising the insuran
amount.
If there is a debit balance it represents the amount of asset value that is unrealisable and as such a loss.
Though, it is a very rare occurrence, the "Abnormal Loss Stock a/c" may carry a credit balance which indicates that t
asset has realised at a value greater than the actual asset value, thereby resulting in a profit.
Whether there is a profit or a loss, it is of abnormal nature since it is related to "Abnormal Loss Stock a/c". The profit
loss is transferred to the "Profit & Loss a/c" thereby closing the "Abnormal Loss Stock a/c".
Adjustments are generally required for transactions which are not yet recorded at the time of making up the final accounts i
towards the end of the accounting period.
Note
Since adjustment is needed at the end of the accounting period, we assume that the proceeds are receivable, expenses are payab
and insurance amount is receivable where the information relating to them is to be incorporated into the accounts.
The net effect would give an understanding on where the amounts are to be adjusted. Since the journal entry representing the n
effect is a compound entry, the number of accounts affected, thereby the number of adjustments to be made , can be identified
the number of accounts involved in the compound entry.
3. The amount of expense payable outstanding if any relating to the abnormal loss stock has to be shown as a liability on t
liabilities side of the balance sheet.
4. The amount of sale proceeds receivable if any relating to the abnormal loss stock has to be shown as an asset on the asse
side of the balance sheet.
5. The insurance amount receivable if any relating to the abnormal loss stock has to be shown as an asset on the assets side
the balance sheet.
Using Temporary Accounts
Recording the value of stock lost on account of abnormal reasons would result in the "Abnormal Loss Stock a/c" or an account by a
relevant name being created. The "Abnormal Loss Stock a/c" would be used in recording the transactions relating to expenses
on the stock, sale realisations, insurance realisation etc., if the entries are being recorded subsequent to recording this
transaction.
However, where the journal entry for recording the value of abnormal loss stock has not yet been recorded, the "Abnormal Loss Sto
a/c" would not be found in the books of accounts. In such cases, where the accountant is confused about which account to use som
temporary account by relevant name would be used to complete recording the transaction.
In such cases, care should be taken to ensure that these temporary accounts are cleared by using them in recording the entr
relating to abnormal loss stock. These can be identified by their presence in the "Trial Balance".
When expenses are paid, a temporary account, say by name "Expenses on Abnormal Loss Stock a/c" may be used
record the expenditure incurred. If such an account is used, it would appear in the "Trial Balance".
This has to be closed by absorbing the expenditure to the "Abnormal Loss Stock a/c".
Journal » Hide/Show
For Sale Realisation
When sale proceeds are received, a temporary account, say by name "Sale of Abnormal Loss Stock a/c" may be used
record the proceeds received/receivable. If such an account is used, it would appear in the "Trial Balance".
This has to be closed by absorbing the proceeds to the "Abnormal Loss Stock a/c".
Journal » Hide/Show
For Insurance Realisation
When insurance realisation is received, a temporary account, say by name "Insurance received a/c" may be used to reo
the amount received/receivable. If such an account is used, it would appear in the "Trial Balance"
This has to be closed by absorbing the proceeds to the "Abnormal Loss Stock a/c".
Journal
Journal in the books of M/s __ for the period from ____ to _____
Credit
V/R Debit Amount
Date Particulars L/F Amount
No. (in Rs)
(in Rs)
Dec 31st – Cash/Bank a/c Dr – 5,000
To Insurance Received a/c – 5,000
Debit Credit
L/
Particulars Amount Amount
F
(in Rs) (in Rs)
–
–
Insurance Received – 5,000
–
–
Total
Journal in the books of M/s __ for the period from ____ to _____
Credit
V/R Debit Amount
Date Particulars L/F Amount
No. (in Rs)
(in Rs)
Dec 31st – Insurance Received a/c Dr – 8,000
To Abnormal Loss Stock a/c – 8,000
Dr Abnormal Loss Stock a/c Cr
J/ Amount J/ Amount
Date Particulars Date Particulars
F (in Rs) F (in Rs)
31/12/05 To Trading a/c – 24,000 –
31/12/05 By Ins. Received – 5,000
For the purpose of incorporating the same information as adjustment, the temporary account is assumed to have got
exhausted and the proceeds are considered for ascertaining the profit or loss on abnormal loss stock.